<PAGE>

                                                                      EXHIBIT 13

                                 PSB GROUP, INC.

                          CONSOLIDATED FINANCIAL REPORT

                                DECEMBER 31, 2003








                                                                               1
<PAGE>

PSB GROUP, INC.

                                                                        CONTENTS

REPORT LETTER

CONSOLIDATED FINANCIAL STATEMENTS

    Balance Sheet

    Statement of Income

    Statement of Changes in Stockholders' Equity

    Statement of Cash Flows

    Notes to Consolidated Financial Statements








                                                                               2
<PAGE>

[PLANTE MORAN LOGO]                                         PLANTE & MORAN, PLLC
                                                                       Suite 500
                                                            2601 Cambridge Court
                                                          Auburn Hills, MI 48326
                                                               Tel: 248.375.7100
                                                               Fax: 248.375.7101
                                                                 plantemoran.com

                          Independent Auditor's Report

To the Board of Directors and Stockholders
PSB Group, Inc.

We have audited the accompanying consolidated balance sheet of PSB Group, Inc.
as of December 31, 2003 and 2002 and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each year in the
three-year period ended December 31, 2003. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PSB
Group, Inc. and subsidiaries as of December 31, 2003 and 2002 and the
consolidated results of their operations and cash flows for each year in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.

                                                   /s/ PLANTE & MORAN, PLLC

Auburn Hills, Michigan
January 12, 2004

                                                                     A member of
                                                                      [MRI LOGO]
                         A worldwide association of Independent accounting firms








                                                                               3
<PAGE>

PSB GROUP, INC.

                                                      CONSOLIDATED BALANCE SHEET
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                            December 31
                                                                    ------------------------
                                                                      2003            2002
                                                                    ---------      ---------
<S>                                                                 <C>            <C>
                                     ASSETS

Cash and due from banks                                             $  14,308      $  14,158

Securities - Available for sale (Note 3)                               47,619         87,498

Loans (Note 4)                                                        326,262        285,602
Less allowance for possible loan losses (Note 4)                       (3,887)        (4,632)
                                                                    ---------      ---------

              Net loans                                               322,375        280,970

Loans held for sale (Note 1)                                              627          3,626
Bank premises and equipment (Note 5)                                    9,213          9,427
Accrued interest receivable                                             1,525          2,061
Goodwill (Note 1)                                                       4,100          4,100
Other assets (Note 9)                                                   1,744            749
                                                                    ---------      ---------

              Total assets                                          $ 401,511      $ 402,589
                                                                    =========      =========
                      LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
    Deposits:
        Noninterest-bearing                                         $  53,412      $  47,550
        Interest-bearing (Note 6)                                     297,576        293,230
                                                                    ---------      ---------

              Total deposits                                          350,988        340,780

    Federal funds purchased                                             2,420          9,210
    FHLB borrowings (Note 7)                                            5,000          5,000
    Accrued taxes, interest, and other liabilities (Note 9)             2,092          2,126
                                                                    ---------      ---------

              Total liabilities                                       360,500        357,116

STOCKHOLDERS' EQUITY (Notes 11, 14, and 17)
    Common stock:
        Authorized - 5,000,000 shares, no par value
        Issued and outstanding - 2,885,073 shares in 2003
           and 3,148,191 shares in 2002                                17,560         23,694
    Retained earnings                                                  23,104         20,861
    Accumulated other comprehensive income (Note 1)                       347            918
                                                                    ---------      ---------

              Total stockholders' equity                               41,011         45,473
                                                                    ---------      ---------

              Total liabilities and stockholders' equity            $ 401,511      $ 402,589
                                                                    =========      =========
</TABLE>

See Notes to Consolidated
   Financial Statements.



                                                                               4
<PAGE>

PSB GROUP, INC.
                                                CONSOLIDATED STATEMENT OF INCOME
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31
                                                                      ------------------------------------------------
                                                                          2003              2002               2001
                                                                      -----------       -----------        -----------
<S>                                                                   <C>               <C>                <C>
INTEREST INCOME
    Loans, including fees                                             $    19,762       $    20,688        $    24,137
    Securities:
        Taxable                                                             1,433             2,404              2,704
        Tax-exempt                                                            873             1,109              1,217
    Federal funds sold                                                         28               220                591
                                                                      -----------       -----------        -----------

              Total interest income                                        22,096            24,421             28,649

INTEREST EXPENSE
    Deposits                                                                5,214             6,588             11,380
    Short-term borrowings                                                     249               228                212
                                                                      -----------       -----------        -----------

              Total interest expense                                        5,463             6,816             11,592
                                                                      -----------       -----------        -----------

NET INTEREST INCOME - Before provision for loan loss recoveries            16,633            17,605             17,057

PROVISION FOR LOAN LOSS RECOVERIES (Note 4)                                     -              (800)            (1,500)
                                                                      -----------       -----------        -----------

NET INTEREST INCOME - After provision for loan loss recoveries             16,633            18,405             18,557

OTHER OPERATING INCOME
    Service charges on deposit accounts                                     2,356             1,597              1,367
    Gain on sale of mortgages                                               1,463             1,125              1,343
    Gain on sale of building and land (Note 10)                                 -                 -                285
    Gain on sale of branch (Note 10)                                            -                 -              1,308
    Gain on sale of available-for-sale securities                             163                76                 18
    Other income                                                            2,053             1,870              1,384
                                                                      -----------       -----------        -----------

              Total other operating income                                  6,035             4,668              5,705

OTHER OPERATING EXPENSES
    Salaries and employee benefits (Note 8)                                 9,550             9,173              9,090
    Occupancy costs                                                         2,769             2,433              2,658
    Legal and professional                                                  1,428             1,158              1,110
    Other operating expenses                                                3,251             2,970              3,332
                                                                      -----------       -----------        -----------

              Total other operating expenses                               16,998            15,734             16,190
                                                                      -----------       -----------        -----------

INCOME - Before federal income taxes                                        5,670             7,339              8,072

FEDERAL INCOME TAXES (Note 9)                                               1,457             2,050              2,252
                                                                      -----------       -----------        -----------

NET INCOME                                                            $     4,213       $     5,289        $     5,820
                                                                      ===========       ===========        ===========

PER SHARE DATA
    Weighted average shares outstanding                                 3,103,497         3,148,191          3,148,191
    Basic earnings                                                    $      1.36       $      1.68        $      1.85
</TABLE>

See Notes to Consolidated
     Financial Statements.



                                                                               5
<PAGE>

PSB GROUP, INC.
                       CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                           (000S OMITTED, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                 Accumulated
                                                                                                     Other            Total
                                                   Number of         Common         Retained     Comprehensive     Stockholders'
                                                    Shares           Stock          Earnings     Income (Loss)        Equity
                                                   ---------       ---------       ---------     -------------     --------------
<S>                                                <C>             <C>             <C>           <C>               <C>
BALANCE - January 1, 2001                          2,562,204       $  16,886       $  17,975       $     (16)      $  34,845

Comprehensive income (Note 1):
   Net income                                              -               -           5,820               -           5,820
   Transfer of held-to-maturity securities to
      available for sale (Note 1)                          -               -               -             175             175
   Change in unrealized gain on securities
      available for sale                                   -               -               -             632             632
                                                                                                                   ---------

              Total comprehensive income                                                                               6,627

Cash dividends - $0.68 per share                           -               -          (2,150)              -          (2,150)
Issuance of common stock (Note 11)                   300,000           2,900               -               -           2,900
                                                   ---------       ---------       ---------       ---------       ---------

BALANCE - December 31, 2001                        2,862,204          19,786          21,645             791          42,222

Comprehensive income (Note 1):
   Net income                                              -               -           5,289               -           5,289
   Change in unrealized gain on securities
      available for sale                                   -               -               -             127             127
                                                                                                                   ---------

              Total comprehensive income                                                                               5,416

Cash dividends - $0.70 per share                           -               -          (2,165)              -          (2,165)
Common stock dividend (Note 11)                      285,987           3,908          (3,908)              -               -
                                                   ---------       ---------       ---------       ---------       ---------

BALANCE - December 31, 2002                        3,148,191          23,694          20,861             918          45,473

Comprehensive income (Note 1):
   Net income                                              -               -           4,213               -           4,213
   Change in unrealized gain on securities
      available for sale                                   -               -               -            (571)           (571)
                                                                                                                   ---------
              Total comprehensive income                                                                               3,642

Repurchase of common stock (Note 11)                (263,118)         (6,134)              -               -          (6,134)
Cash dividends - $0.64 per share                           -               -          (1,970)              -          (1,970)
                                                   ---------       ---------       ---------       ---------       ---------

BALANCE - December 31, 2003                        2,885,073       $  17,560       $  23,104       $     347       $  41,011
                                                   =========       =========       =========       =========       =========
</TABLE>
Book value per share is $14.22, $14.44, and $13.41 at December 31, 2003, 2002,
and 2001, respectively.

See Notes to Consolidated
     Financial Statements.


                                                                               6
<PAGE>

PSB GROUP, INC.

                                            CONSOLIDATED STATEMENT OF CASH FLOWS
                                                                  (000S OMITTED)

<TABLE>
<CAPTION>
                                                                                           Year Ended December 31
                                                                                    --------------------------------------
                                                                                      2003           2002           2001
                                                                                    --------       --------       --------
<S>                                                                                 <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                      $  4,213       $  5,289       $  5,820
    Adjustments to reconcile net income to net cash from operating activities:
         Depreciation and amortization                                                 1,136          1,014          1,261
         Provision for loan loss                                                           -           (800)        (1,500)
         Accretion and amortization of securities                                        802            683            352
         Deferred income taxes                                                            75            500          1,390
         Gain on sale of branch                                                            -              -         (1,308)
         Gain on sale of available-for-sale securities                                  (163)           (76)           (18)
         Loss on sale of assets                                                            -              2             99
         Decrease in accrued interest receivable                                         536            139            230
         (Increase) decrease in other assets                                            (776)          (321)           774
         Increase (decrease) in accrued interest payable and other liabilities           (34)           (92)           496
                                                                                    --------       --------       --------

              Net cash provided by operating activities                                5,789          6,338          7,596

CASH FLOWS FROM INVESTING ACTIVITIES
    Net cash paid - Sale of branch (Note 10)                                               -              -         (3,491)
    Purchase of securities available for sale                                        (15,558)       (63,021)       (27,127)
    Proceeds from maturities of securities available for sale                         41,705         37,807         26,465
    Proceeds from sale of securities available for sale                               12,228          6,563             38
    Net decrease (increase) in loans                                                 (41,405)       (14,556)        21,134
    Net decrease (increase) in loans held for sale                                     2,999          2,093         (2,455)
    Capital expenditures                                                                (956)        (1,391)        (1,564)
    Proceeds from sale of fixed assets                                                    34             79            317
                                                                                    --------       --------       --------

              Net cash provided by (used in) investing activities                       (953)       (32,426)        13,317

CASH FLOWS FROM FINANCING ACTIVITIES
    Net increase (decrease) in time deposits                                           1,141        (15,596)       (33,770)
    Net increase in other deposits                                                     9,067         10,821         26,493
    Net increase (decrease) in federal funds purchased                                (6,790)         9,210              -
    FHLB advances                                                                          -              -          5,000
    Purchase of common stock                                                          (6,134)             -              -
    Cash dividends                                                                    (1,970)        (2,165)        (2,150)
                                                                                    --------       --------       --------

              Net cash provided by (used in) financing activities                     (4,686)         2,270         (4,427)
                                                                                    --------       --------       --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     150        (23,818)        16,486

CASH AND CASH EQUIVALENTS - Beginning of year                                         14,158         37,976         21,490
                                                                                    --------       --------       --------

CASH AND CASH EQUIVALENTS - End of year                                             $ 14,308       $ 14,158       $ 37,976
                                                                                    ========       ========       ========
SUPPLEMENTAL INFORMATION - Cash paid for
    Interest                                                                        $  5,297       $  6,952       $ 11,879
    Income taxes                                                                       1,393          1,548          1,085
</TABLE>

See Notes to Consolidated
     Financial Statements.



                                                                               7
<PAGE>

PSB GROUP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 2003, 2002, AND 2001

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         BASIS OF PRESENTATION AND CONSOLIDATION - The consolidated financial
         statements include the accounts of PSB Group, Inc. (the "Corporation")
         and its wholly owned subsidiary, Peoples State Bank, Inc. (the "Bank").
         PSB Title Insurance Agency, Inc. (PSB) and Universal Mortgage Company
         (UMC) are wholly owned subsidiaries of Peoples State Bank, Inc. All
         significant intercompany transactions are eliminated in consolidation.

         PSB Group, Inc. was formed on February 28, 2003 as a bank holding
         company for the purpose of owning Peoples State Bank, Inc. pursuant to
         a plan of reorganization adopted by the Bank and its stockholders.
         Pursuant to the reorganization, each share of Peoples State Bank, Inc.
         stock held by existing stockholders of the Bank was exchanged for three
         shares of common stock of PSB Group, Inc. The reorganization had no
         consolidated financial statement impact. Share amounts for all prior
         periods presented have been restated to reflect the reorganization.

         USE OF ESTIMATES - The accounting and reporting policies of PSB Group,
         Inc. conform to accounting principles generally accepted in the United
         States of America. Management is required to make significant estimates
         (such as the allowance for possible loan losses, deferred taxes,
         foreclosed assets, valuation of intangible assets, and goodwill) and
         assumptions that affect the amounts reported in the consolidated
         financial statements and accompanying notes. Actual results could
         differ from these estimates and assumptions.

         NATURE OF OPERATIONS - The Corporation provides full-service banking
         through 10 branch offices and four loan origination offices to the
         Michigan communities of Wayne, Oakland, Macomb, and Genesee counties.

         SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK - Most of the
         Corporation's activities are with customers located within Michigan.
         Note 3 discusses the types of securities in which the Corporation
         invests. Note 4 discusses the types of lending in which the Corporation
         engages. The Corporation does not have any significant concentrations
         to any one industry or customer.

         CASH AND CASH EQUIVALENTS - For purposes of the consolidated statement
         of cash flows, cash and cash equivalents include cash and balances due
         from banks, federal funds sold, and securities purchased under
         agreements to resell, all of which mature within 90 days.

         SECURITIES - Debt securities that management has the positive intent
         and the ability to hold to maturity are classified as "held to
         maturity" and recorded at amortized cost. Securities not classified as
         held to maturity or trading, including equity securities with readily
         determinable fair values, are classified as "available for sale" and
         are recorded at fair value, with unrealized gains and losses, net of
         related deferred income taxes, excluded from earnings and reported in
         other comprehensive income.

         Purchase premiums and discounts are recognized in interest income using
         the interest method over the terms of the securities. Declines in the
         fair values of held-to-maturity and available-for-sale securities below
         their cost that are deemed to be other than temporary are reflected in
         earnings as realized losses. Gains and losses on the sale of securities
         are recorded on the trade date and are determined using the specific
         identification method.

         LOANS - The Corporation grants mortgage, commercial, and consumer loans
         to customers. Loans are reported at their outstanding unpaid principal
         balances, adjusted for charge offs, the allowance for loan losses, and
         any deferred fees or costs on originated loans. Interest income is
         accrued on the unpaid principal balance. Loan origination fees, net of
         certain direct origination costs, are recognized as an adjustment of
         the related loan yield using the interest method.

         The accrual of interest on loans is discontinued at the time the loan
         is 90 days delinquent unless the credit is well-secured and in the
         process of collection. In all cases, loans are placed on nonaccrual or
         charged off at an earlier date if principal or interest is considered
         doubtful.



                                                                               8
<PAGE>

PSB GROUP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 2003, 2002, AND 2001

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         All interest accrued but not collected for loans that are placed on
         nonaccrual or charged off, is reversed against interest income. The
         interest on these loans is accounted for on the cash basis or cost
         recovery method, until qualifying for return to accrual. Loans are
         returned to accrual status when all the principal and interest amounts
         contractually due are brought current and future payments are
         reasonably assured.

         LOANS HELD FOR SALE - Loans originated and intended for sale in the
         secondary market are carried at the lower of cost or estimated fair
         value in the aggregate. Net unrealized losses, if any, are recognized
         in a valuation allowance by charges to income.

         ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is
         established as losses are estimated to have occurred through a
         provision for loan losses charged to earnings. Loan losses are charged
         against the allowance when management believes the uncollectibility of
         a loan balance is confirmed. Subsequent recoveries, if any, are
         credited to the allowance.

         The allowance for loan losses is evaluated on a regular basis by
         management and is based on management's periodic review of the
         collectibility of the loans in light of historical experience, the
         nature and volume of the loan portfolio, adverse situations that may
         affect the borrower's ability to repay, estimated value of any
         underlying collateral, and prevailing economic conditions. This
         evaluation is inherently subjective as it requires estimates that are
         susceptible to significant revision as more information becomes
         available.

         The allowance consists of specific, general, and unallocated
         components. The specific components relate to loans that are classified
         as either doubtful, substandard, or special mention. For such loans
         that are also classified as impaired, an allowance is established when
         the discounted cash flows (or collateral value or observable market
         price) of the impaired loan is lower than the carrying value of that
         loan. The general component covers nonclassified loans and is based on
         historical loss experience adjusted for qualitative factors. An
         unallocated component is maintained to cover uncertainties that could
         affect management's estimate of probable losses. The unallocated
         component of the allowance reflects the margin of imprecision inherent
         in the underlying assumptions used in the methodologies for estimating
         specific and general losses in the portfolio.

         A loan is considered impaired when, based on current information and
         events, it is probable that the Corporation will be unable to collect
         the scheduled payments of principal and interest when due according to
         the contractual terms of the loan agreement. Factors considered by
         management in determining impairment include payment status, collateral
         value, and the probability of collecting scheduled principal and
         interest payments when due. Loans that experience insignificant payment
         delays and payment shortfalls generally are not classified as impaired.
         Management determines the significance of payment delays and payment
         shortfalls on a case-by-case basis, taking into consideration all of
         the circumstances surrounding the loan and the borrower, including
         length of the delay, the reasons for the delay, the borrower's prior
         payment record, and the amount of the shortfall in relation to the
         principal and interest owed. Impairment is measured on a loan-by-loan
         basis for commercial and construction loans by either the present value
         of expected future cash flows discounted at the loan's effective
         interest rate, the loan's obtainable market price, or the fair value of
         the collateral if the loan is collateral dependent.

         Large groups of homogenous loans are collectively evaluated for
         impairment. Accordingly, the Corporation does not separately identify
         individual consumer and residential loans for impairment disclosures.

         OFF-BALANCE-SHEET INSTRUMENTS - In the ordinary course of business, the
         Corporation has entered into commitments to extend credit, including
         commitments under credit card arrangements, commercial letters of
         credit, and standby letters of credit.



                                                                               9
<PAGE>

PSB GROUP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 2003, 2002, AND 2001

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
         Guarantor's Accounting and Disclosure Requirements for Guarantees,
         Including Indirect Guarantees of Indebtedness of Others, which
         elaborates on the disclosures to be made by a guarantor about its
         obligations under certain guarantees issued. It also clarifies that a
         guarantor is required to recognize, at the inception of a guarantee, a
         liability for the fair value of the obligation undertaken in issuing
         the guarantee. The initial recognition and measurement provisions of
         this Interpretation have been applied on a prospective basis to
         guarantees issued or modified after December 31, 2002. However, the
         value of such guarantees is immaterial and the adoption of this
         Standard did not have a material effect on the Corporation's financial
         statements.

         FORECLOSED ASSETS - Assets acquired through, or in lieu of, loan
         foreclosure are held for sale and are initially recorded at fair value
         at the date of the foreclosure, establishing a new cost basis.
         Subsequent to foreclosure, valuations are periodically performed by
         management and the assets are carried at the lower of carrying amount
         or fair value less cost to sell. Revenue and expenses from operations
         and changes in the valuation allowance are included in net expenses
         from foreclosed assets.

         BANK PREMISES AND EQUIPMENT - Land is carried at cost. Premises and
         equipment are stated at cost, less accumulated depreciation and
         amortization. Depreciation, computed on the straight-line method, is
         charged to operations over the estimated useful lives of the
         properties. Leasehold improvements are amortized over the terms of
         their respective leases or the estimated useful lives of the
         improvements, whichever is shorter.

         INCOME TAXES - Deferred income tax assets and liabilities are
         determined using the liability (or balance sheet) method. Under this
         method, the net deferred tax asset or liability is determined based on
         the tax effects of the various temporary differences between the book
         and tax bases of the various balance sheet assets and liabilities and
         gives current recognition to changes in tax rates and laws.

         EARNINGS PER COMMON SHARE - Basic earnings per share represents income
         available to common stockholders divided by the weighted-average number
         of common shares outstanding during the period.

         COMPREHENSIVE INCOME - Accounting principles generally require that
         revenue, expenses, gains, and losses be included in net income. Certain
         changes in assets and liabilities, however, such as unrealized gains
         and losses on available-for-sale securities, are reported as a separate
         component of the equity section of the balance sheet. Such items, along
         with net income, are components of comprehensive income.

         The components of accumulated other comprehensive income and related
         tax effects are as follows (000s omitted):

<TABLE>
<CAPTION>
                                                        2003         2002         2001
                                                     ---------    ---------    ---------
<S>                                                  <C>          <C>          <C>
Unrealized holding gains on available-for-sale
     securities                                      $     526    $   1,391    $   1,199
Tax effect                                                 179          473          408
                                                     ---------    ---------    ---------
     Accumulated other comprehensive income          $     347    $     918    $     791
                                                     =========    =========    =========
</TABLE>

         DERIVATIVE FINANCIAL INSTRUMENTS - On January 1, 2001, the Corporation
         adopted Statement of Financial Accounting Standards No. 133 (SFAS 133),
         Accounting for Derivative Instruments and Hedging Activities. SFAS 133
         requires that all derivative instruments be recorded on the balance
         sheet at their fair value. Changes in the fair value of derivatives are
         recorded each period in current earnings or other comprehensive income,
         depending on whether a derivative is designated as part of a hedge
         transaction and, if it is, the type of hedge transaction. The
         accounting for derivatives had no effect on the financial statements.



                                                                              10
<PAGE>

PSB GROUP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 2003, 2002, AND 2001

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         Under the transition provisions of SFAS 133, the Corporation made a
         one-time transfer of securities classified as held to maturity to
         securities classified as available for sale. The following securities
         were transferred. The unrealized gains or losses at the time of the
         transfer were credited to other comprehensive income, net of tax.

<TABLE>
<CAPTION>
                                           (000s omitted)
                              Amortized                       Unrealized
   Type of Security             Cost         Fair Value       Gain (Loss)
------------------------      ---------    --------------     -----------
<S>                           <C>             <C>             <C>
Corporate bonds               $  20,872       $  20,799       $     (73)
Municipals - Taxable              6,602           6,623              21
Municipals - Tax exempt          14,996          15,313             317
                              ---------       ---------       ---------

        Totals                $  42,470       $  42,735       $     265
                              =========       =========       =========
</TABLE>

         In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
         on Derivative Instruments and Hedging Activities (SFAS 149). This
         Statement amends and clarifies financial accounting and reporting for
         derivative instruments, including certain embedded derivatives, and for
         hedging activities under SFAS 133. SFAS 149 is effective for contracts
         entered into or modified after June 30, 2003, and for hedging
         relationships designated after June 30, 2003. Adoption of this Standard
         did not have a material effect on the Corporation's consolidated
         financial statements.

         GOODWILL AND OTHER INTANGIBLE ASSETS - Effective January 1, 2002, the
         Corporation adopted Statement of Financial Accounting Standards No.
         142, Goodwill and Other Intangible Assets (SFAS 142), which changed the
         Corporation's accounting for goodwill and other intangible assets.
         Generally, intangible assets that meet certain criteria are recognized
         and subsequently amortized over their estimated useful lives. Goodwill
         and intangible assets with indefinite lives are not amortized. However,
         such assets are tested for impairment at least annually. The adoption
         of SFAS 142 resulted in an increase in net income for 2002 of
         approximately $164,000 due to a decrease in amortization expense. No
         impairment loss was recorded upon the adoption of SFAS 142.

         The following table adjusts net income as reported to exclude goodwill
         amortization (000s omitted):

<TABLE>
<CAPTION>
                                          2003           2002             2001
                                       --------        --------        --------
<S>                                    <C>             <C>             <C>
Reported net income                    $  4,213        $  5,289        $  5,820
Add back - Goodwill amortization              -               -             164
                                       --------        --------        --------

Adjusted net income                    $  4,213        $  5,289        $  5,984
                                       ========        ========        ========
</TABLE>

         For the years ended December 31, 2003 and 2002, there were no
         impairment losses, write offs or additions to goodwill.

         RECLASSIFICATIONS - Certain items in the December 31, 2002 financial
         report have been reclassified to conform with the December 31, 2003
         financial report.


                                                                              11
<PAGE>

PSB GROUP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 2003, 2002, AND 2001

NOTE 2 - RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS

         The Corporation is required to maintain average balances on hand or
         with the Federal Reserve Bank. At December 31, 2003 and 2002, these
         reserve balances amounted to $5,036,000 and $4,265,000, respectively.

NOTE 3 - SECURITIES

         The amortized cost and estimated market value of securities are as
         follows (000s omitted):

<TABLE>
<CAPTION>
                                                                                   2003
                                                          ------------------------------------------------------
                                                                            Gross          Gross       Estimated
                                                          Amortized       Unrealized     Unrealized      Market
                                                            Cost            Gains         Losses         Value
                                                          ---------      -----------     ----------    ---------
<S>                                                       <C>            <C>            <C>             <C>
Available-for-sale securities:
   U.S. Treasury securities and obligations of U.S.
      government corporations and agencies                $ 27,195       $    178       $    (14)       $ 27,359
   Obligations of state and political
      subdivisions                                          17,274            362             (9)         17,627
   Corporate debt securities                                 1,000              9              -           1,009
   Other                                                     1,624              -              -           1,624
                                                          --------       --------       --------        --------

Total available-for-sale securities                       $ 47,093       $    549       $    (23)       $ 47,619
                                                          ========       ========       ========        ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                   2002
                                                          ------------------------------------------------------
                                                                            Gross          Gross       Estimated
                                                          Amortized       Unrealized     Unrealized      Market
                                                            Cost            Gains         Losses         Value
                                                          ---------      -----------     ----------    ---------
<S>                                                       <C>            <C>            <C>             <C>
Available-for-sale securities:
   U.S. Treasury securities and obligations of U.S.
      government corporations and agencies                $ 45,148       $    581       $     (2)       $ 45,727
   Obligations of state and political
      subdivisions                                          28,603            681            (17)         29,267
   Corporate debt securities                                10,793            148              -          10,941
   Other                                                     1,563              -              -           1,563
                                                          --------       --------       --------        --------

Total available-for-sale securities                       $ 86,107       $  1,410       $    (19)       $ 87,498
                                                          ========       ========       ========        ========
</TABLE>



                                                                              12
<PAGE>

PSB GROUP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 2003, 2002, AND 2001

NOTE 3 - SECURITIES (CONTINUED)

         The amortized cost and estimated market value of securities at December
         31, 2003, by contractual maturity, are shown below. Expected maturities
         will differ from contractual maturities because issuers may have the
         right to call or prepay obligations with or without call or prepayment
         penalties (000s omitted):

<TABLE>
<CAPTION>
                                                    Available for Sale
                                             --------------------------------
                                             Amortized Cost      Market Value
                                             --------------      ------------
<S>                                          <C>                 <C>
Due in one year or less                      $     21,598        $     21,683
Due in one through five years                      15,377              15,670
Due after five years through ten years              1,258               1,312
Due after ten years                                 1,445               1,475
                                             ------------        ------------

              Total                                39,678              40,140

Federal agency pools                                5,791               5,855
Other                                               1,624               1,624
                                             ------------        ------------

              Total                          $     47,093        $     47,619
                                             ============        ============
</TABLE>

         Proceeds from the sale of available-for-sale securities during 2003,
         2002, and 2001 were $12,228,000, $6,563,000, and $38,000, respectively.

         At December 31, 2003 and 2002, securities having a carrying value of
         $2,009,844 and $2,052,409 (market value of $2,027,500 and $2,108,125),
         respectively, were pledged to secure public deposits, repurchase
         agreements, and for other purposes required by law.

NOTE 4 - LOANS

         A summary of the balances of loans at December 31, 2003 and 2002 is as
         follows (000s omitted):

<TABLE>
<CAPTION>
                                              2003                2002
                                         ------------        ------------
<S>                                      <C>                 <C>
Mortgage loans on real estate:
    Residential 1-4 family               $    103,864        $    100,436
    Commercial                                114,167              82,089
    Construction                               15,496               6,893
    Second mortgages                            3,440               3,589
    Equity lines of credit                      8,887               4,837
                                         ------------        ------------
              Total mortgage loans            245,854             197,844
Commercial loans                               54,203              63,548
Consumer installment loans                     27,024              24,738
                                         ------------        ------------

              Subtotal                        327,081             286,130
Less allowances for loan losses                (3,887)             (4,632)
Net deferred loan fees                           (819)               (528)
                                         ------------        ------------

              Loans - Net                $    322,375        $    280,970
                                         ============        ============
</TABLE>


                                                                              13
<PAGE>

PSB GROUP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 2003, 2002, AND 2001

NOTE 4 - LOANS (CONTINUED)

         An analysis of the allowance for loan losses is as follows (000s
         omitted):

<TABLE>
<CAPTION>
                                          2003              2002               2001
                                       ----------        ----------        ----------
<S>                                    <C>               <C>               <C>
Balance - Beginning of year            $    4,632        $    5,585        $   10,891

Reduction credited to operations                -              (800)           (1,500)
Loan losses                                (1,553)           (2,162)           (4,971)
Loan loss recoveries                          808             2,009             1,165
                                       ----------        ----------        ----------

Balance - End of year                  $    3,887        $    4,632        $    5,585
                                       ==========        ==========        ==========

As a percentage of total loans               1.19              1.60              2.02
                                       ==========        ==========        ==========
</TABLE>

         The following is a summary of information pertaining to impaired loans
         (000s omitted):

<TABLE>
<CAPTION>
                                                                  2003                2002
                                                              ------------        ------------
<S>                                                           <C>                 <C>
Impaired loans without a valuation allowance                  $        693        $          -
Impaired loans with a valuation allowance                              803               2,526
                                                              ------------        ------------

              Total impaired loans                            $      1,496        $      2,526
                                                              ============        ============

Valuation allowance related to impaired loans                 $        446        $        766
                                                              ============        ============

Total non-accrual loans                                       $      1,496        $      2,526
                                                              ============        ============

Total loans past due 90 days or more and still accruing       $      1,189        $        132
                                                              ============        ============
</TABLE>

<TABLE>
<CAPTION>
                                                       2003              2002               2001
                                                    ----------        ----------        ----------
<S>                                                 <C>               <C>               <C>
Average investment in impaired loans                $    1,300        $    2,202        $    2,550
                                                    ==========        ==========        ==========

Interest income recognized on impaired loans        $       16        $       83        $       80
                                                    ==========        ==========        ==========

Interest income recognized on a cash basis on
    impaired loans                                  $       15        $       75        $       80
                                                    ==========        ==========        ==========
</TABLE>
         No additional funds are committed to be advanced in connection with
         impaired loans.


                                                                              14
<PAGE>

PSB GROUP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 2003, 2002, AND 2001

NOTE 5 - BANK PREMISES AND EQUIPMENT

         Bank premises and equipment at December 31, 2003 and 2002 consisted of
         the following (000s omitted):

<TABLE>
<CAPTION>
                                                          2003                 2002
                                                      ------------        ------------
<S>                                                   <C>                 <C>
Land                                                  $      1,874        $      1,873
Buildings and improvements                                   8,187               8,110
Furniture, fixtures, and equipment                           8,611               7,815
                                                      ------------        ------------

              Total bank premises and equipment             18,672              17,798

Less accumulated depreciation and amortization               9,459               8,371
                                                      ------------        ------------

              Net carrying amount                     $      9,213        $      9,427
                                                      ============        ============
</TABLE>

         Depreciation expense totaled $1,136,000, $1,014,000, and $1,097,000
         during 2003, 2002, and 2001, respectively.

         Pursuant to the terms of noncancelable lease agreements in effect at
         December 31, 2003 pertaining to banking premises and equipment, future
         minimum rent commitments under various operating leases are as follows
         (000s omitted):

<TABLE>
<S>                            <C>
2004                           $        334
2005                                    306
2006                                    249
2007                                    109
2008                                     64
Thereafter                              182
                               ------------

              Total            $      1,244
                               ============
</TABLE>

         Total rent expense for the years ended December 31, 2003, 2002, and
         2001 amounted to $348,000, $269,000, and $142,000, respectively.

NOTE 6 - DEPOSITS

         Interest-bearing deposits at December 31, 2003 and 2002 consisted of
         the following (000s omitted):

<TABLE>
<CAPTION>
                                                       2003              2002
                                                    ----------        ----------
<S>                                                 <C>               <C>
NOW accounts                                        $   32,736        $   34,088
Savings                                                 62,443            61,653
Money market demand                                     67,312            63,545
Time:
    $100,000 and over                                   62,030            59,459
    Under $100,000                                      73,055            74,485
                                                    ----------        ----------

              Total interest-bearing deposits       $  297,576        $  293,230
                                                    ==========        ==========
</TABLE>


                                                                              15
<PAGE>

PSB GROUP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 2003, 2002, AND 2001

NOTE 6 - DEPOSITS (CONTINUED)

         The remaining maturities of certificates of deposit outstanding at
         December 31, 2003 are as follows (000s omitted):

<TABLE>
<CAPTION>
                                                        Under           $100,000
                                                      $100,000          and Over
                                                     ----------        ----------
<S>                                                  <C>               <C>
2004                                                 $   39,347        $   38,690
2005                                                     18,834            13,725
2006                                                      5,221             2,562
2007                                                      7,726             5,420
2008                                                      1,807             1,633
Thereafter                                                  120                 -
                                                     ----------        ----------

   Total                                             $   73,055        $   62,030
                                                     ==========        ==========
</TABLE>

NOTE 7 - BORROWING ARRANGEMENTS

         The Corporation has an agreement with the Federal Home Loan Bank of
         Indianapolis under which the Corporation may obtain advances up to an
         aggregate amount of $26,000,000. The Corporation has provided a blanket
         pledge of all of the Corporation's residential mortgage loans as
         collateral on advances under this agreement. Borrowings outstanding
         under this agreement totaled $5,000,000 at December 31, 2003 and 2002.
         The advance matures on January 22, 2011 with principal due at that
         time. Interest-only payments are due monthly at a rate of 4.43 percent
         at December 31, 2003.

NOTE 8 - RETIREMENT PLANS

         The Corporation has a defined contribution 401(k), employee
         profit-sharing, and Employee Stock Ownership (ESOP) plan covering
         substantially all employees. Employee matching contributions are
         discretionary. The Corporation typically matches 100 percent of the
         first 3 percent of employee contributions and 50 percent of the next 3
         percent of employee contributions. Employer profit-sharing
         contributions are at the discretion of the Corporation's Board of
         Directors. Employer matching contributions to the plan were
         approximately $245,000, $229,000, and $221,000 during 2003, 2002, and
         2001, respectively. Employer profit-sharing contributions to the plan
         were approximately $181,000, $289,000, and $319,000 during 2003, 2002,
         and 2001, respectively.

         During 2001, the Bank amended and restated the 401(k) and
         profit-sharing plan to add an ESOP feature. All future profit-sharing
         contributions will be used to purchase Corporation stock for eligible
         employees.

NOTE 9 - FEDERAL INCOME TAXES

         The provision for federal income taxes reflected in the consolidated
         statement of income for the years ended December 31, 2003, 2002, and
         2001 consisted of the following (000s omitted):

<TABLE>
<CAPTION>
                                                  2003            2002            2001
                                                --------        --------        --------
<S>                                             <C>             <C>             <C>
Current expense                                 $  1,382        $  1,550        $    862
Deferred expense                                      75             500           1,390
                                                --------        --------        --------

                 Total income tax expense       $  1,457        $  2,050        $  2,252
                                                ========        ========        ========
</TABLE>


                                                                              16
<PAGE>

PSB GROUP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 2003, 2002, AND 2001

NOTE  9 -  FEDERAL INCOME TAXES (CONTINUED)

         A reconciliation of the difference between total federal income tax
         expense and the amount computed by applying the statutory tax rates to
         income before income taxes follows (000s omitted):

<TABLE>
<CAPTION>
                                                   Percent of Pretax Income
                                              ------------------------------------
                                              2003            2002            2001
                                              ----            ----            ----
<S>                                           <C>             <C>             <C>
Amount computed at statutory rates              34              34              34
Decrease resulting from:
     Tax-exempt municipal interest              (5)             (5)             (2)
     Other                                      (3)             (1)             (4)
                                              ----            ----            ----

              Reported tax expense              26              28              28
                                              ====            ====            ====
</TABLE>

         The details of the net deferred tax liability at December 31, 2003 and
         2002 are as follows (000s omitted):

<TABLE>
<CAPTION>
                                                        2003                2002
                                                    ------------        ------------
<S>                                                 <C>                 <C>
Deferred tax assets:
    Provision for loan losses                       $        663        $        665
    Net deferred loan fees                                   277                 179
    Accrued employee benefits                                 55                  59
    Deferred compensation                                    151                   -
    Other                                                     98                  90
                                                    ------------        ------------

              Total deferred tax assets                    1,244                 993

Valuation allowance                                            -                   -

Deferred tax liabilities:
    Property and equipment                                   715                 690
    Original issue discount                                  311                   -
    Unrealized gains on investment securities
        available for sale                                   179                 473
    Other                                                     84                  94
                                                    ------------        ------------

              Total deferred tax liabilities               1,289               1,257
                                                    ------------        ------------

              Net deferred tax liability            $        (45)       $       (264)
                                                    ============        ============
</TABLE>

NOTE 10 - BANK BRANCHES

         Effective March 15, 2001, the Bank closed on a branch sale and
         assumption agreement with a newly formed bank holding company. Pursuant
         to that agreement, the Bank sold certain assets and transferred certain
         liabilities to the newly formed bank holding company.


                                                                              17
<PAGE>

PSB GROUP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 2003, 2002, AND 2001

NOTE 10 - BANK BRANCHES (CONTINUED)

         The net carrying amounts of the assets sold and liabilities transferred
         were as follows (000s omitted):

<TABLE>
<CAPTION>
<S>                                                       <C>
Assets:
    Cash                                                  $      3,491
    Loans (including accrued interest)                          11,101
    Fixed assets                                                    79
                                                          ------------

              Total assets                                      14,671

Liabilities - Deposits (including accrued interest)            (15,979)
                                                          ------------

              Gain on sale of branch                      $      1,308
                                                          ============
</TABLE>

         Effective June 2001, the Bank closed a branch. The cash, furniture,
         fixtures, equipment, and deposits were transferred to another branch.
         On December 27, 2001, the Bank sold the land and building of the branch
         for $850,000. The Bank received a down payment of approximately
         $212,000 and accepted a land contract of approximately $638,000 for the
         remaining balance. The Bank recognized a $285,000 gain, which is
         recorded in other income. The land contract is recorded in commercial
         loans on the consolidated balance sheet and has been treated as a
         noncash financing transaction on the consolidated statement of cash
         flows.

NOTE 11 - STOCK TRANSACTIONS

         In May 1998, Peoples State Bank acquired Madison National Bank (MNB).
         The acquisition agreement provided for an additional contingent
         distribution of up to 300,000 shares based on the performance of the
         acquired loans through December 31, 2000. As stipulated by the
         acquisition agreement, the value and number of additional shares to be
         distributed were to be based on the market value of shares outstanding
         as of December 31, 2000, which was $9.667 per share. The performance
         criteria were met and the full 300,000 shares were issued to the former
         MNB stockholders on April 9, 2001. As a result, the Bank recorded
         additional goodwill of $2,900,000 for the value of the additional
         shares issued. This amount was treated as a noncash financing activity
         on the consolidated statement of cash flows.

         On April 23, 2002, the stockholders approved a 10 percent stock
         dividend to holders of record of common stock of the Bank on April 30,
         2002. Earnings per share and cash dividends per share for all years
         provided have been adjusted in the accompanying consolidated financial
         statements to reflect the stock dividend.

         On October 31, 2003, the Corporation repurchased and retired 263,118
         shares of common stock for $6,134,000 from a director of the
         Corporation.

NOTE 12 - OFF-BALANCE-SHEET ACTIVITIES

         CREDIT-RELATED FINANCIAL INSTRUMENTS - The Corporation is a party to
         credit-related financial instruments with off-balance-sheet risk in the
         normal course of business to meet the financing needs of its customers.
         These financial instruments include commitments to extend credit,
         standby letters of credit, and commercial letters of credit. Such
         commitments involve, to varying degrees, elements of credit and
         interest rate risk in excess of the amount recognized in the
         consolidated balance sheet.

         The Corporation's exposure to credit loss is represented by the
         contractual amount of these commitments. The Corporation follows the
         same credit policies in making commitments as it does for
         on-balance-sheet instruments.


                                                                              18
<PAGE>

PSB GROUP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 2003, 2002, AND 2001

NOTE 12 - OFF-BALANCE-SHEET ACTIVITIES (CONTINUED)

         At December 31, 2003 and 2002, the following financial instruments were
         outstanding whose contract amounts represent credit risk (000s
         omitted):

<TABLE>
<CAPTION>
                                                    2003               2002
                                                 ----------        ----------
<S>                                              <C>               <C>
Commitments to grant loans                       $   19,392        $   11,985
Unfunded commitments under lines of credit           15,281            18,454
Commercial and standby letters of credit              2,073             2,095
</TABLE>

         Commitments to extend credit are agreements to lend to a customer as
         long as there is no violation of any condition established in the
         contract. Commitments generally have fixed expiration dates or other
         termination clauses and may require payment of a fee. The commitments
         for equity lines of credit may expire without being drawn upon.
         Therefore, the total commitment amounts do not necessarily represent
         future cash requirements. The amount of collateral obtained, if it is
         deemed necessary by the Corporation, is based on management's credit
         evaluation of the customer.

         Unfunded commitments under commercial lines of credit, revolving credit
         lines, and overdraft protection agreements are commitments for possible
         future extensions of credit to existing customers. These lines of
         credit are generally collateralized and usually do not contain a
         specified maturity date and may not be drawn upon to the total extent
         to which the Corporation is committed.

         Commercial and standby letters of credit are conditional commitments
         issued by the Corporation to guarantee the performance of a customer to
         a third party.

         Those letters of credit are primarily used to support public and
         private borrowing arrangements. Essentially all letters of credit
         issued have expiration dates within one year. The Corporation generally
         holds collateral supporting those commitments if deemed necessary.

         COLLATERAL REQUIREMENTS - To reduce credit risk related to the use of
         credit-related financial instruments, the Corporation might deem it
         necessary to obtain collateral. The amount and nature of the collateral
         obtained are based on the Bank's credit evaluation of the customer.
         Collateral held varies, but may include cash, securities, accounts
         receivable, inventory, property, plant, and equipment, and real estate.

NOTE 13 - LEGAL CONTINGENCIES

         Various legal claims also arise from time to time in the normal course
         of business which, in the opinion of management, will have no material
         effect on the Corporation's consolidated financial statements.

NOTE 14 - RESTRICTIONS ON DIVIDENDS, LOANS, AND ADVANCES

         Federal and state banking regulations place certain restrictions on
         dividends paid and loans or advances made by the Bank. The total amount
         of dividends that may be paid at any date is generally limited to the
         retained earnings of the Bank, and loans or advances are limited to 10
         percent of the Bank's capital stock and surplus on a secured basis.

         At December 31, 2003, the Bank's retained earnings available for the
         payment of dividends was $15,148,000. Accordingly, $24,041,000 of the
         Corporation's equity in the net assets of the Bank was restricted at
         December 31, 2003. Funds available for loans or advances by the Bank to
         the Corporation amounted to $2,369,000.


                                                                              19
<PAGE>

PSB GROUP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 2003, 2002, AND 2001

NOTE 14 - RESTRICTIONS ON DIVIDENDS, LOANS, AND ADVANCES (CONTINUED)

         In addition, dividends paid by the Bank would be prohibited if the
         effect thereof would cause the Bank's capital to be reduced below
         applicable minimum capital requirements.

NOTE 15 - RELATED PARTY TRANSACTIONS

         In the ordinary course of business, the Corporation has granted loans
         to principal officers and directors and their affiliates amounting to
         $1,028,000 at December 31, 2003 and $2,519,000 at December 31, 2002.
         During the year ended December 31, 2003, total principal additions were
         $27,000 and total principal payments were $1,518,000.

         Deposits from related parties held by the Corporation at December 31,
         2003 and 2002 amounted to $924,000 and $278,000, respectively.

         GUARANTEES - The Bank has performance obligations upon the occurrence
         of certain events under financial guarantees provided in certain
         contractual arrangements. These various arrangements are summarized
         below.

         At December 31, 2003, the Corporation had issued approximately
         $2,073,000 of financial standby letters of credit to guarantee the
         performance of various customers to third parties. The maximum amount
         of credit risk in the event of nonperformance by these parties is
         equivalent to the contract amount and totals $2,073,000. At December
         31, 2003, the Corporation maintained a credit loss reserve of
         approximately $149,000 relating to these financial standby letters of
         credit. Almost all of the standby letters of credit are secured and, in
         the event of nonperformance by the customers, the Corporation has
         rights to the underlying collateral provided including commercial real
         estate, physical plant and property, inventory, receivables, cash, and
         marketable securities.

NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS

         The fair value of a financial instrument is the current amount that
         would be exchanged between willing parties, other than in a forced
         liquidation. Fair value is best determined based on quoted market
         prices. However, in many instances, there are no quoted market prices
         for the Corporation's various financial instruments. In cases where
         quoted market prices are not available, fair values are based on
         estimates using present value or other valuation techniques. Those
         techniques are significantly affected by the assumptions used,
         including the discount rate and estimates of future cash flows.
         Accordingly, the fair value estimates may not be realized in an
         immediate settlement of the instrument. SFAS 107 excludes certain
         financial instruments and all nonfinancial instruments from its
         disclosure requirements. Accordingly, the aggregate fair value amounts
         presented may not necessarily represent the underlying fair value of
         the Corporation.

         The following methods and assumptions were used by the Corporation in
         estimating fair value disclosures for financial instruments:

         CASH AND CASH EQUIVALENTS - The carrying amounts of cash and short-term
         instruments approximate fair values.

         SECURITIES - Fair values for securities are based on quoted market
         prices.

         LOANS HELD FOR SALE - Fair values for loans held for sale are based on
         commitments on hand from investors or prevailing market prices.


                                                                              20
<PAGE>

PSB GROUP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 2003, 2002, AND 2001

NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

         LOANS RECEIVABLE - For variable-rate loans that reprice frequently and
         with no significant change in credit risk, fair values are based on
         carrying values. Fair values for certain mortgage loans (e.g., one- to
         four-family residential), credit card loans, and other consumer loans
         are based on quoted market prices of similar loans sold in conjunction
         with securitization transactions, adjusted for differences in loan
         characteristics. Fair values for other loans (e.g., commercial real
         estate and investment property mortgage loans, commercial, and
         industrial loans) are estimated using discounted cash flow analyses,
         using interest rates currently being offered for loans with similar
         terms to borrowers of similar credit quality. Fair values for
         nonperforming loans are estimated using discounted cash flow analyses
         or underlying collateral values, where applicable.

         DEPOSIT LIABILITIES - The fair values disclosed for demand deposits
         (e.g., interest and noninterest checking, passbook savings, and certain
         types of money market accounts) are, by definition, equal to the amount
         payable on demand at the reporting date (i.e., their carrying amounts).
         The carrying amounts of variable-rate, fixed-term money market accounts
         and certificates of deposit approximate their fair values at the
         reporting date. Fair values for fixed-rate certificates of deposit are
         estimated using a discounted cash flow calculation that applies
         interest rates currently being offered on certificates to a schedule of
         aggregated expected monthly maturities on time deposits.

         LONG-TERM BORROWINGS - The fair values of the Corporation's long-term
         borrowings are estimated using discounted cash flow analyses based on
         the Bank's current incremental borrowing rates for similar types of
         borrowing arrangements.

         SHORT-TERM BORROWINGS - The carrying amounts of federal funds
         purchased, borrowings under repurchase agreements, and other short-term
         borrowings maturing within 90 days approximate their fair values. Fair
         values of other short-term borrowings are estimated using discounted
         cash flow analyses based on the Corporation's current incremental
         borrowing rates for similar types of borrowing arrangements.

         ACCRUED INTEREST - The carrying amounts of accrued interest approximate
         fair value.

         OTHER INSTRUMENTS - The fair values of other financial instruments,
         including loan commitments and unfunded letters of credit, based on a
         discounted cash flow analyses, are not material.

         The estimated fair values and related carrying or notional amounts of
         the Corporation's financial instruments are as follows (000s omitted):

<TABLE>
<CAPTION>
                                                   2003                                2002
                                       ----------------------------        ----------------------------
                                        Carrying         Estimated          Carrying         Estimated
                                         Amount          Fair Value          Amount          Fair Value
                                       ----------        ----------        ----------        ----------
<S>                                    <C>               <C>               <C>               <C>
Assets:
    Cash and short-term
        investments                    $   14,308        $   14,308        $   14,158        $   14,158
    Securities                             47,619            47,619            87,498            87,498
    Loans                                 322,375           324,867           280,970           282,651
    Loans held for sale                       627               627             3,626             3,626
    Accrued interest receivable             1,520             1,520             2,061             2,061
Liabilities:
    Noninterest-bearing deposits           53,412            53,412            47,550            47,550
    Interest-bearing deposits             297,576           298,088           293,230           294,972
    Federal funds purchased                 2,420             2,420             9,210             9,210
    FHLB borrowings                         5,000             5,000             5,000             5,000
    Accrued taxes, interest, and
        other liabilities                   2,083             2,083             2,126             2,126
</TABLE>


                                                                              21
<PAGE>

PSB GROUP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 2003, 2002, AND 2001

NOTE 17 - REGULATORY MATTERS

         The Corporation (on a consolidated basis) and the Bank are subject to
         various regulatory capital requirements administered by federal banking
         agencies. Failure to meet minimum capital requirements can initiate
         certain mandatory and discretionary actions by regulators that could
         have a direct material effect on the Corporation's and the Bank's
         consolidated financial statements. Under capital adequacy guidelines
         and the regulatory framework for prompt corrective action, the
         Corporation and the Bank must meet specific capital guidelines that
         involve quantitative measures of their assets, liabilities, and certain
         off-balance-sheet items as calculated under regulatory accounting
         practices. The capital amounts and classification are also subject to
         qualitative judgments by the regulators about components, risk
         weightings, and other factors. Prompt corrective action provisions are
         not applicable to bank holding companies.

         Quantitative measures established by regulation to ensure capital
         adequacy require the Corporation and the Bank to maintain minimum
         amounts, and ratios (set forth in the following table) of total Tier I
         capital (as defined in the regulations) to risk-weighted assets (as
         defined) and Tier I capital (as defined) to average assets (as
         defined). Management believes, as of December 31, 2003 and 2002, that
         the Corporation and the Bank met all capital adequacy requirements to
         which they are subject.

         As of December 31, 2003, the most recent notification from the Bank's
         primary regulator categorized the Bank as well-capitalized under the
         regulatory framework for prompt corrective action. To be categorize as
         well-capitalized, an institution must maintain minimum total
         risk-based, Tier I risked-based, and Tier I leverage ratios as set
         forth in the following tables. There are no conditions or events since
         the notification that management believes have changed the Bank's
         category. The Corporation's and the Bank's actual capital amounts and
         ratios as of December 31, 2003 and 2002 are also presented in the
         table.

<TABLE>
<CAPTION>
                                                                            For Capital                       To Be Well-
                                                  Actual                 Adequacy Purposes                    capitalized
                                           -------------------      --------------------------      -----------------------------
                                            Amount       Ratio        Amount             Ratio        Amount               Ratio
                                           --------      -----       --------            -----      ----------             ------
<S>                                        <C>           <C>         <C>        <C>      <C>        <C>           <C>      <C>
As of December 31, 2003:
     Total capital
          (to risk-weighted assets)
               PSB Group, Inc.             $ 40,367      13.27%      $ 24,300   > or =    8.0%       $   30,400   > or =   10.0%
               Peoples State Bank, Inc.    $ 38,540      12.67%      $ 24,300   > or =    8.0%       $   30,400   > or =   10.0%
     Tier I capital
          (to risk-weighted assets)
               PSB Group, Inc.             $ 36,564      12.02%      $ 12,200   > or =    4.0%       $   18,200   > or =    6.0%
               Peoples State Bank, Inc.    $ 34,743      11.42%      $ 12,200   > or =    4.0%       $   18,200   > or =    6.0%
     Tier I capital
          (to average assets)
               PSB Group, Inc.             $ 36,564       9.13%      $ 16,000   > or =    4.0%       $   20,000   > or =    5.0%
               Peoples State Bank, Inc.    $ 34,743       8.67%      $ 16,000   > or =    4.0%       $   20,000   > or =    5.0%

As of December 31, 2002:
     Total capital
          (to risk-weighted assets)        $ 44,000      15.58%      $ 22,600   > or =    8.0%       $   28,250   > or =   10.0%
     Tier I capital
          (to risk-weighted assets)        $ 40,455      14.32%      $ 11,300   > or =    4.0%       $   16,950   > or =    6.0%
     Tier I capital
          (to average assets)              $ 40,455      10.20%      $ 15,867   > or =    4.0%       $   19,834   > or =    5.0%
</TABLE>


                                                                              22
<PAGE>

PSB GROUP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 2003, 2002, AND 2001

NOTE 18 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

         The following represents the condensed financial statements of PSB
         Group, Inc. (the "Parent") only. The Parent-only financial information
         should be read in conjunction with the Corporation's consolidated
         financial statements.

         The condensed balance sheet at December 31, 2003 is as follows (000s
         omitted):

<TABLE>
<CAPTION>
<S>                                             <C>
ASSETS
     Cash at subsidiary bank                    $      1,754
     Investment in subsidiary                         39,190
     Other                                                67
                                                ------------

               Total assets                     $     41,011
                                                ============

STOCKHOLDERS' EQUITY                            $     41,011
                                                ============
</TABLE>

         The condensed statement of income for the year ended December 31, 2003
         is as follows (000s omitted):

<TABLE>
<S>                                                                 <C>
Operating income                                                    $          -
Operating expense                                                           (181)
                                                                    ------------
                 Loss - Before income taxes and equity in
                     income of subsidiary                                   (181)

Income tax benefit                                                            62
                                                                    ------------

                 Loss - Before equity in income of subsidiary               (119)

Equity in income of subsidiary                                             4,332
                                                                    ------------

                 Net income                                         $      4,213
                                                                    ============
</TABLE>


                                                                              23
<PAGE>

PSB GROUP, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               DECEMBER 31, 2003, 2002, AND 2001

NOTE 18 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (CONTINUED)

         The condensed statement of cash flows for the year ended December 31,
         2003 is as follows (000s omitted):

<TABLE>
<S>                                                            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                 $      4,213
    Adjustments to reconcile net income to net cash from
        operating activities:
            Equity in income of subsidiary                           (4,332)
            Net change in other assets                                  (67)
                                                               ------------

                Net cash used in operating activities                  (186)

CASH FLOWS FROM INVESTING ACTIVITIES - Dividend from
    subsidiary                                                       10,044

CASH FLOWS FROM FINANCING ACTIVITIES
    Repurchase of common stock                                       (6,134)
    Cash dividends                                                   (1,970)
                                                               ------------

                Net cash used in financing activities                (8,104)
                                                               ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                             1,754

CASH AND CASH EQUIVALENTS - Beginning of year                             -
                                                               ------------

CASH AND CASH EQUIVALENTS - End of year                        $      1,754
                                                               ============
</TABLE>


                                                                              24
<PAGE>

                                 PSB GROUP, INC.

                           MANAGEMENT FINANCIAL REPORT

                                DECEMBER 31, 2003




                                                                              25

<PAGE>
<TABLE>
<CAPTION>
                       TABLE OF CONTENTS
<S>                                                                       <C>
Quarterly Results of Operations.....................................          27
Selected Financial Information......................................          28
Management's Discussion and Analysis................................       29-38
Market Information..................................................          39
</TABLE>


                                                                              26
<PAGE>

PSB GROUP, INC.

                                                 QUARTERLY RESULTS OF OPERATIONS

                                                                     (UNAUDITED)

  The following table sets forth certain unaudited income and expense and per
share data on a quarterly basis for the three-month periods indicated:

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31, 2003
                                             -------------------------------------
                                             1ST QTR   2ND QTR   3RD QTR   4TH QTR
                                             -------   -------   -------   -------
<S>                                          <C>       <C>       <C>       <C>
Interest income                              $ 5,645   $ 5,641   $ 5,439   $ 5,371
Interest expense                               1,386     1,368     1,340     1,369
                                             -------   -------   -------   -------

Net interest income                            4,259     4,273     4,099     4,002
Provision for loan losses                          0         0         0         0
                                             -------   -------   -------   -------
Net interest income after
     provision for loan losses                 4,259     4,273     4,099     4,002

Non-interest income                            1,344     1,519     1,669     1,503
Non-interest expense                           4,155     4,471     4,322     4,050
                                             -------   -------   -------   -------

Income before income taxes                     1,448     1,321     1,446     1,455
Income Tax                                       396       358       407       296
                                             -------   -------   -------   -------

Net Income                                   $ 1,052   $   963   $ 1,039   $ 1,159
                                             =======   =======   =======   =======

Earnings per share:
                               Basic         $  0.33   $  0.31   $  0.33   $  0.39
                              Diluted        $  0.33   $  0.31   $  0.33   $  0.39

Cash dividends declared per share            $  0.15   $  0.15   $  0.17   $  0.17
</TABLE>

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31, 2002
                                             -------------------------------------
                                             1ST QTR   2ND QTR   3RD QTR   4TH QTR
                                             -------   -------   -------   -------
<S>                                          <C>       <C>       <C>       <C>
Interest income                              $ 6,259   $ 6,246   $ 6,052   $ 5,864
Interest expense                               1,883     1,866     1,620     1,447
                                             -------   -------   -------   -------

Net interest income                            4,376     4,380     4,432     4,417
Provision for loan losses                          0      (500)     (300)        0
                                             -------   -------   -------   -------

Net interest income after
     provision for loan losses                 4,376     4,880     4,732     4,417

Non-interest income                              980     1,070     1,140     1,478
Non-interest expense                           3,931     3,843     3,886     4,074
                                             -------   -------   -------   -------

Income before income taxes                     1,425     2,107     1,986     1,821
Income Tax                                       364       597       569       520
                                             -------   -------   -------   -------

Net Income                                   $ 1,061   $ 1,510   $ 1,417   $ 1,301
                                             =======   =======   =======   =======

Earnings per share:
                               Basic         $  0.34   $  0.48   $  0.45   $  0.41
                              Diluted        $  0.34   $  0.48   $  0.45   $  0.41

Cash dividends declared per share            $  0.15   $  0.15   $  0.15   $  0.25
</TABLE>

                                                                              27
<PAGE>

PSB GROUP, INC.

                                                  SELECTED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                    FOR THE YEARS ENDED DECEMBER 31
                                                         --------------------------------------------------------------
                                                                        (Dollars in Thousands)
                                                            2003        2002          2001         2000          1999
                                                         ---------    ---------    ---------    ---------     ---------
<S>                                                      <C>          <C>          <C>          <C>           <C>
SUMMARY OF INCOME
     Interest income                                        22,096       24,421       28,649       30,847        27,368
     Interest expense                                        5,463        6,816       11,592       14,427        11,898
                                                         ---------    ---------    ---------    ---------     ---------

          Net Interest income                               16,633       17,605       17,057       16,420        15,470
     Provision (credit) for possible loan losses                 -         (800)      (1,500)      (1,600)       (1,750)
                                                         ---------    ---------    ---------    ---------     ---------

     Net interest income after provision for
          possible loan losses                              16,633       18,405       18,557       18,020        17,220
     Non-interest income                                     6,035        4,668        5,705        3,582         2,133
     Non-interest expense                                   16,998       15,734       16,190       15,897        14,739
                                                         ---------    ---------    ---------    ---------     ---------

     Income before income tax expense                        5,670        7,339        8,072        5,705         4,614
     Income tax expense                                      1,457        2,050        2,252        1,584         1,326
                                                         ---------    ---------    ---------    ---------     ---------

     Net income                                              4,213        5,289        5,820        4,121         3,288
                                                         =========    =========    =========    =========     =========
PER SHARE DATA
     Basic earnings per common share                          1.36         1.68         1.85         1.45          1.15
     Diluted earnings per common share                        1.36         1.68         1.85         1.31          1.04
     Cash dividends                                           0.64         0.70         0.68         1.54          0.54
     Period end book value per common share                  14.22        14.44        13.41        12.23         11.21
     Weighted average number of common
          shares outstanding                             3,103,497    3,148,191    3,148,191    2,848,191     2,848,191

SELECTED BALANCES (AT PERIOD END)
     Securities                                             47,619       87,498       69,262       67,749        84,594
     Loans, net                                            322,375      280,970      265,614      298,456       267,641
     Total assets                                          401,511      402,589      394,995      406,618       387,011
     Total deposits                                        350,988      340,780      345,555      368,711       337,197
     Borrowings                                              7,420       14,210        5,000                     15,300
     Total stockholders' equity                             41,011       45,473       42,222       34,845        31,923

SELECTED RATIOS
     Return on average assets                                 1.04%        1.33%        1.45%        1.03%         0.88%
     Return on average total stockholders' equity             9.30%       12.06%       14.80%       12.53%        10.63%
     Average equity to average assets                        11.23%       11.05%        9.79%        8.18%         8.31%
     Net interest margin (1)                                  4.41%        4.74%        4.50%        4.32%         4.37%
     Efficiency ratio (2)                                    74.99%       70.64%       71.13%       79.48%        83.73%
     Dividend payout ratio (3)                               47.00%       41.00%       37.00%       37.00%        47.00%

ASSET QUALITY RATIOS
     Allowance for possible loan losses to:
          Ending total loans                                  1.19%        1.62%        2.06%        3.51%         4.82%
          Non-performing assets                              87.11%      110.73%      226.30%      139.04%       194.78%
     Non-performing assets to ending total loans              1.37%        1.46%        0.91%        1.79%         2.47%
     Net loan charge-offs to average loans                    0.24%        0.06%        1.38%        0.35%        -0.50%

CAPITAL RATIOS
     Total capital to risk-weighted assets                   13.27%       15.58%       14.93%       12.69%        13.11%
     Tier 1 capital to risk-weighted assets                  12.02%       14.32%       13.67%       11.43%        11.81%
     Tier 1 capital to average assets                         9.13%       10.20%        9.31%        8.28%         7.99%
</TABLE>

(1) Net interest margin is net interest income divided by average earning
assets.

(2) Efficiency ratio is calculated by dividing non-interest expense by the sum
of net interest income plus non-interest income.

(3) Dividend payout ratio is calculated by dividing dividends paid during the
period by net income for the period.

                                                                              28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

         OVERVIEW. PSB Group, Inc. (the "Corporation") was formed on February
28, 2003 as a bank holding company for the purpose of owning Peoples State Bank,
Inc. (the "Bank") pursuant to a plan of reorganization adopted by the Bank and
its stockholders. Pursuant to the reorganization, each share of Peoples State
Bank, Inc. stock held by existing stockholders of the Bank was exchanged for
three shares of common stock of PSB Group, Inc. The reorganization had no
consolidated financial statement impact. Share amounts for all prior periods
presented have been restated to reflect the reorganization.

         The consolidated financial statements include the accounts of PSB
Group, Inc. and its wholly owned subsidiary, Peoples State Bank, Inc. PSB
Insurance Agency, Inc. and Universal Mortgage Company are wholly owned
subsidiaries of Peoples State Bank. All significant inter-company transactions
are eliminated in consolidation.

         Net income is derived primarily from net interest income, which is the
difference between interest earned on the Bank's loan and investment portfolios
and its cost of funds, primarily interest paid on deposits and borrowings. The
volume of and yields earned on loans and investments and the volume of and rates
paid on deposits determine net interest income.

         FINANCIAL CONDITION. Assets consist of loans, investment securities,
bank premises and equipment, cash and other operating assets. At December 31,
2003, the Corporation had assets totaling $402 million compared to $403 million
at December 31, 2002. While total assets remained relatively flat, there was a
significant shift in assets during 2003. Investment securities were reduced by
$40 million during the year. The proceeds from this reduction, plus the $10
million increase in deposits were used to fund a $40.7 million increase in the
higher yielding loans. In addition, federal funds borrowings were reduced by
$6.8 million during the year. During 2002 total assets increased by $8 million.
The increase in assets the Bank experienced in 2002 is mostly attributable to an
$18 million increase in investment securities and a $14 million increase in
loans. These increases were funded by the re-deployment of approximately $24
million in cash and federal funds sold to the higher yielding assets, as well as
a $9 million increase in short-term borrowings.

         Loans - Loans consist of commercial, residential mortgage, and consumer
products offered in the communities served by the Bank. Total loans, net of the
allowance for loan losses, at December 31, 2003, increased to $322.4 million, up
$41.4 million, or 14.7% for the year. Loans, net of allowance for loan losses,
increased $15.4 million, or 5.8% from $265.6 million to $281.0 million at
December 31, 2001 and 2002, respectively.

         Commercial loans increased from $145.6 million to $168.4 million, an
increase of $22.8 million or 15.7% during 2003. During 2002 commercial loans
increased $26.8 million or 22.6% from $118.8 million at December 31, 2001. The
continued increase in 2003 was primarily the result of aggressive marketing, the
continued presence of the Bank in its market areas and the desire of customers
to deal with a community bank.

         1-4 family residential mortgage loan balances totaled $103.9 and $100.4
million as of December 31, 2003 and 2002, respectively. Residential mortgage
loan balances increased $3.5 million or 3.5% during 2003. 1-4 family residential
loans decreased $7.9 million or 7.3% during 2002. The increase in 2003 was
primarily the result of management's decision to keep more loans in the Bank's
portfolio. Three and five year ARM and some shorter term fixed rate loans that
in prior years were sold in the secondary market, were kept in the Bank's
portfolio in 2003. The decrease in 2002 was primarily due to the low interest
rate environment and the large number of mortgage pre-payments that resulted.

         Consumer loans increased $2.3 million or 9.2% in 2003 from $24.7
million to $27.0 million. Consumer loans decreased $6.4 million or 20.6% in 2002
from $31.1 million to $24.7 million at December 31, 2002.

         The following table shows the details of the Bank's loan portfolio as
of the dates indicated. Mortgages on real estate include 1-4 family residential,
commercial real estate, construction loans, second mortgages and equity lines of
credit (see Note 4 to the financial statements). Loan balances are shown net of
unearned income.

<TABLE>
<CAPTION>

                                                       December 31,
                               ---------------------------------------------------------
                                  2003       2002         2001       2000         1999
                                  ----       ----         ----       ----         ----
                                                     (in thousands)
<S>                            <C>         <C>         <C>         <C>         <C>
Mortgages on real estate       $ 245,520   $ 197,540   $ 159,022   $ 170,585   $ 174,567
Commercial                        53,725      63,330      81,020     110,139      88,976
Consumer                          27,017      24,732      31,157      26,622      17,645
                               ---------   ---------   ---------   ---------   ---------
  Total Loans                  $ 326,262   $ 285,602   $ 271,199   $ 307,346   $ 281,188
                               =========   =========   =========   =========   =========
</TABLE>

                                                                              29
<PAGE>

         The following table shows the loans by category as of December 31, 2003
and the period in which they mature. Loan balances are shown net of unearned
income.

<TABLE>
<CAPTION>
                                                                                       Loans maturing
                                               One year                             More than one year
                                    One year   to five    After five               --------------------
                                     or less    years       years        Total       Fixed     Variable
                                    --------------------------------------------   --------------------
                                                                (in thousands)
<S>                                 <C>        <C>         <C>         <C>         <C>         <C>
Mortgages on real estate            $ 22,527   $138,665    $ 84,328    $ 245,520   $ 111,968   $111,025
Commercial                            19,017     27,027       7,681       53,725      13,485     21,223
Consumer                               2,935     18,092       5,990       27,017      23,557        525
                                    --------   --------    --------    ---------   ---------   --------
  Total Loans                       $ 44,479   $183,784    $ 97,999    $ 326,262   $ 149,010   $132,773
                                    ========   ========    ========    =========   =========   ========
</TABLE>

         During 2002 and 2001, Management concluded that reserves provided for
in the allowance for possible loan loss balance had exceeded the estimated
reserves required. Negative loan loss provisions of $800 thousand and $1.5
million were recorded in 2002 and 2001, respectively, to reduce the balance to
appropriate levels. In 2003, Management believed the allowance for loan losses
to be at an appropriate level with no loan loss provision, positive or negative.
Management anticipates recording a loan loss provision in 2004 in order to
maintain the allowance at a proper level based on the anticipated increase in
our loan portfolio. The Bank's investment in impaired loans was $1.5 million at
December 31, 2003 compared to $2.7 million at December 31, 2002 and $2.0 million
at December 31, 2001. The Bank recorded net charge offs of $745 thousand in 2003
compared to $153 thousand in 2002 and $3.8 million in 2001. The Bank's allowance
for possible loan losses to impaired loans was at a ratio of 260%, 169% and 275%
as of December 31, 2003, 2002, and 2001, respectively. At December 31, 2003 the
allowance for possible loan losses totaled $3.9 million, or 1.2% of total
outstanding loans.

The following table shows the detail of non-performing loans as of the dates
indicated.

<TABLE>
<CAPTION>
                                                                             December 31,
                                                    ---------------------------------------------------
                                                     2003        2002      2001       2000       1999
                                                     ----        ----      ----       ----       ----
                                                                         (in thousands)
<S>                                                 <C>        <C>        <C>        <C>        <C>
Nonaccrual loans                                    $ 1,496    $ 2,746    $   281    $ 1,835    $ 2,882
Loans past due 90 or more days                        1,189        306        602        845        343
Renegotiated loans                                      808        907      1,585      2,663      2,829
                                                    -------    -------    -------    -------    -------
Total non-performing loans                            3,493      3,959      2,468      5,343      6,054
Other real estate owned                                 969        224          -        154      1,214
                                                    -------    -------    -------    -------    -------
  Total non-performing assets                       $ 4,462    $ 4,183    $ 2,468    $ 5,497    $ 7,268
                                                    =======    =======    =======    =======    =======

Total non-performing loans to total loans              1.07%      1.39%      0.91%      1.72%      2.15%

Total non-performing assets to total assets            1.11%      1.03%      0.62%      1.35%      1.88%
</TABLE>

         The Bank places loans in non-accrual status when, in the opinion of
management, uncertainty exists as to the ultimate collection of principal and
interest. The Bank has no foreign loans. Management knows of no loans which have
not been disclosed above which cause it to have doubts as to the ability of such
borrowers to comply with the contractual loan terms, or which may have a
material effect on the Bank's balance sheet or results from operations. Total
non-performing loans decreased $466 thousand in 2003 to $3.5 million. Other real
estate increased $745 thousand in 2003. As of December 31, 2003, other real
estate consists of two properties. Other real estate is carried on the books at
the lower of, fair value less the estimated cost to sell, or, the carrying
amount of the loan at the date of foreclosure.

                                                                              30
<PAGE>

         The following table shows the allocation of the allowance for loan
losses by specific category as of the dates indicated.

<TABLE>
<CAPTION>
                                                                December 31,
             ------------------------------------------------------------------------------------------------------------------
                   2003                    2002                    2001                   2000                    1999
             ------------------------------------------------------------------------------------------------------------------
                                                              (in thousands)
                        Percent of             Percent of             Percent of             Percent of              Percent of
                         Loans in               Loans in               Loans in               Loans in                Loans in
                           Each                   Each                   Each                   Each                    Each
                         Category               Category               Category               Category                Category
             Allocated   to Total   Allocated   to Total   Allocated   to Total   Allocated   to Total   Allocated    to Total
              Amount      Loans      Amount      Loans      Amount      Loans      Amount      Loans      Amount       Loans
             ---------  ----------  ---------  ----------  ---------  ----------  ---------  ----------  ---------   ----------
<S>          <C>        <C>         <C>        <C>         <C>        <C>         <C>        <C>         <C>         <C>
Mortgages    $     121    75.30%    $     396    69.60%    $     270    59.50%    $     656    55.90%    $     655     62.10%
Commercial       1,971    16.50%        2,476    21.90%        3,609    29.30%        7,873    35.50%       11,663     31.60%
Consumer         1,134     8.20%        1,345     8.50%        1,456    11.20%        1,623     8.60%          569      6.30%
Unallocated        661                    415      n/a           250      n/a           739      n/a           660       n/a
             ---------  -------     ---------  -------     ---------  -------     ---------  -------     ---------   -------
  Total      $   3,887   100.00%    $   4,632   100.00%    $   5,585   100.00%    $  10,891   100.00%    $  13,547    100.00%
</TABLE>

         Investment securities - Investment securities totaled $47.6 million as
of December 31, 2003 versus $87.5 million as of December 31, 2002, a decrease of
$39.9 million. Each of these figures includes adjustments for fluctuations in
market values on available for sale securities (see Note 3 to the financial
statements). Due to the low interest rate environment and the lack of suitable
replacement securities, the investment portfolio was reduced during 2003.
Proceeds from the securities that either matured or were sold in 2003 were used
to fund the increase in the loan portfolio. During 2003, the Bank sold certain
securities that generated $163 thousand in gains. This compares to $76 thousand
gained on the sale of securities in 2002.

         The following table shows the amortized cost and the fair market value
of the Bank's security portfolio as of the dates indicated.

<TABLE>
<CAPTION>
                                                                December 31,
                                   ---------------------------------------------------------------------
                                            2003                   2002                     2001
                                   --------------------   ----------------------    --------------------
                                   Amortized      Fair    Amortized       Fair      Amortized     Fair
                                     Cost        Value      Cost         Value         Cost      Value
                                     ----        -----      ---          -----         ----      -----
                                                              (in thousands)
<S>                                <C>         <C>        <C>          <C>          <C>         <C>
Available-for-sale securities:
U. S. treasury securities and
    obligations of other U.S.
    government agencies            $  27,195   $ 27,359    $ 45,148    $ 45,727     $ 21,355    $ 21,840
Obligations of states and
   political subdivisions             17,274     17,627      28,603      29,267       26,485      26,924
Mortgage-backed securities                 -          -           -           -          221         224
Corporate debt securities              1,000      1,009      10,793      10,941       18,439      18,711
Equities                               1,624      1,624       1,563       1,563        1,563       1,563
                                   --------------------   ---------------------     --------------------

   Total available-for-sale
       securities                     47,093     47,619      86,107      87,498       68,063      69,262
                                   ====================   =====================     ====================
</TABLE>

                                                                              31
<PAGE>

         Maturity of the investment securities (at par value) and the weighted
average yield for each range of maturities as of December 31, 2003 are shown in
the table below. The yields on municipal securities have not been adjusted for
tax equivalence.

<TABLE>
<CAPTION>
                                                  From one to    From five to     After ten
                              One year or less    five years      ten years         years           Equity             Total
                              ----------------  -------------   -------------   --------------  --------------    ----------------
                              Dollar   Yield    Dollar  Yield   Dollar  Yield   Dollar   Yield  Dollar   Yield    Dollar     Yield
                              ------   -----    ------  -----   ------  -----   ------   -----  ------   -----   ---------   -----
                                                                         (in thousands)
<S>                          <C>       <C>     <C>      <C>     <C>     <C>     <C>      <C>    <C>      <C>     <C>         <C>
Obligations of U.S.
   government agencies       $ 10,040   2.95%  $15,960   2.76%  $    -      -   $  948   5.33%  $    -       -   $  26,948     2.92%
Obligations of states and
   political subdivisions      11,500   2.67%    3,975   7.46%   1,260   8.32%     445   8.52%       -       -      17,180     4.34%
Mortgage-backed securities          -      -         -      -        -      -        -      -        -       -           -        -
Corporate debt securities           -      -         -      -        -      -    1,000   4.78%       -       -       1,000     4.78%
Equity securities & others          -      -         -      -        -      -        -      -    1,624    5.00%      1,624     5.00%
                             --------  -----   -------  -----   ------  -----   ------   ----   ------   -----   ---------   ------
  Total                      $ 21,540   2.80%  $19,935   3.70%  $1,260   8.32%  $2,393   5.69%  $1,624    5.00%  $  46,752     3.56%
                             --------  -----   -------  -----   ------  -----   ------   ----   ------   -----   ---------   ------
</TABLE>

         Deposits - The Bank depends primarily upon customer deposits and
short-term borrowing for funds with which to conduct its business. Bank deposits
consist primarily of retail deposit products including checking and savings
accounts from individuals and businesses, NOW accounts, money market demand
accounts and time deposit accounts (CDs). Deposits totaled $351.0 million and
$340.8 million at December 31, 2003 and 2002, respectively, an increase of $10.2
million, or 3.0%. December 31, 2002 deposits decreased $4.81 million or 1.4%
from the $345.6 million balance at December 31, 2001. Non-interest bearing
demand deposits saw the biggest increase ($5.9 million) in 2003 followed by
money market accounts ($3.8 million) certificates of deposit ($1.1 million) and
savings accounts ($790 thousand). NOW accounts decreased $1.4 million in 2003.
Although total deposits remained relatively stable during 2002, decreasing by
only $4.8 million, there was a shift from certificates of deposit to our other
deposit products. During 2002 certificates of deposit decreased $15.6 million
while NOW balances increased $6.4 million and money market balances increased
$4.6 million.

         Management relies on lower-interest bearing demand and savings deposit
accounts to fund significant portions of the Bank's operations. These accounts
greatly improve net interest margins because of the lower interest rates
expected by the customers. Non-interest bearing demand deposits plus savings
deposits increased $6.7 million in 2003

         The following table shows the details of the Bank's deposit balances as
of the dates indicated.

<TABLE>
<CAPTION>
                                         December 31,
                              ----------------------------------
                                2003          2002        2001
                                ----          ----        ----
                                        (in thousands)
<S>                           <C>          <C>         <C>
Noninterest bearing
   demand deposits            $  53,412    $  47,550   $  45,217
NOW accounts                     32,736       34,088      27,716
Savings                          62,443       61,653      64,131
Money market demand              67,312       63,545      58,951
Time under $100,000              73,055       74,485      81,742
Time over $100,000               62,030       59,459      67,798
                              ---------    ---------   ---------
   Total deposits             $ 350,988    $ 340,780   $ 345,555
                              =========    =========   =========
</TABLE>

                                                                              32
<PAGE>

         The following table shows the maturity breakdown of the Bank's time
deposits over $100,000 as of December 31, 2003.

<TABLE>
<CAPTION>
                                                   December 31, 2003
                                                   -----------------
                                                     (in thousands)
<S>                                                <C>
Time Deposits
  Over $100,000
  Maturing in:
Less than three months                                 $ 20,089
Three through six months                                  4,909
Six months through one year                              13,692
Over one year                                            23,340
                                                       --------
   Total deposits                                      $ 62,030
                                                       ========
</TABLE>

         Borrowings - At December 31, 2003 and December 31, 2002 the Bank had
$5,000,000 in borrowings outstanding from the Federal Home Loan Bank of
Indianapolis (see Note 7 to the financial statements). This advance matures on
January 22, 2011. At December 31, 2003 the Bank also had $2,420,000 in
short-term federal funds purchased outstanding at the rate of 1.19%. This
compares to $9,210,000 in short-term federal funds purchased outstanding at
December 31, 2002 at the rate of 1.38%. There were no short-term borrowings
outstanding at December 31, 2001.

         The following table shows the balance, term and interest rate of the
Bank's borrowings from the Federal Home Loan Bank.

<TABLE>
<CAPTION>
                                                                         Outstanding as of
                                                                            12/31/2002
                                                12/31/2003                  ----------               12/31/2001
                             Year               ----------            (dollars in thousands)         ----------
        Type                Matures       Dollar        Yield          Dollar       Yield        Dollar       Yield
        ----                -------       ------       -------        -------       -----        ------       -----
<S>                         <C>           <C>          <C>            <C>           <C>          <C>          <C>
FHLB Advances                2011         $5,000          4.43%       $ 5,000        4.43%       $5,000        4.43%
                                          ------       -------        -------       -----        ------       -----
  Total notes payable                     $5,000          4.43%       $ 5,000        4.43%       $5,000        4.43%
                                          ======       =======        =======       =====        ======       =====
</TABLE>

         Contractual Obligations - The Corporation is party to certain
contractual financial obligations, including the repayment of debt and operating
lease payments. These future financial obligations are presented below:

<TABLE>
<CAPTION>
                                              Payments due - as of December 31, 2003
                            --------------------------------------------------------------
                                                    (in thousands)
                            0-12 Months   1-3 Years   4-5 Years    After 5 Years    Total
                            -----------   ---------   ---------   --------------   -------
<S>                         <C>           <C>         <C>         <C>              <C>
Operating Leases               $ 334        $ 555       $ 173        $   182       $ 1,244
FHLB Advances                                                        $ 5,000       $ 5,000
                               -----        -----       -----        -------       -------
     Total                     $ 334        $ 555       $ 173        $ 5,182       $ 6,244
                               =====        =====       =====        =======       =======
</TABLE>

         Off Balance Sheet Obligations - At December 31, 2003, the Corporation
also had commitments to extend credit of $34.7 million and a $2.1 million
obligation under a stand-by letter of credit.

         RESULTS OF OPERATIONS. Net income for the year ended December 31, 2003
was $4.2 million, a $1.1 million, or 21% decrease from the $5.3 million earned
in 2002. The largest single contributing factor in the 2003 decrease was the
fact that an $800 thousand negative loan loss provision was taken into income in
2002. There was a $531 thousand decrease in net income in 2002 that was
primarily the result of the $1.5 million negative loan loss provision that was
taken into income in 2001.

         Interest and fee income on loans decreased approximately $926 thousand
in 2003. This decrease was primarily the result of the low interest rate
environment in 2003. Average outstanding loan balances increased $25.5 million
in 2003 but the increase in balances was more than offset by lower loan yields.

                                                                             33
<PAGE>

         Interest income on investments also suffered in 2003, decreasing by
$1.2 million. This decrease was also due to a large extent to the low interest
rate environment. As investments matured or were sold, the proceeds were either
reinvested in lower yielding securities or redeployed to the loan portfolio.

         Interest expense decreased $1.4 million in 2003. The decrease in
interest expense was also due to the low interest rate environment in 2003. The
decrease in interest expense was more than offset by the total decrease in
interest income. The result was a $972 thousand decrease in net interest income
in 2003

         The following table presents the Bank's consolidated balance of earning
assets, interest bearing liabilities, the amount of interest income or interest
expense attributable to each category, the average yield or rate for each
category and the net interest margin for the periods indicated. Interest income
is stated on a non-tax equivalent basis. Non-accrual loan balances are included
in the loan totals.

<TABLE>
<CAPTION>
                                                                  Year ended December 31,
                                    ------------------------------------------------------------------------------------
                                              2003                        2002                         2001
                                              ----                        ----                         ----
                                     Average                     Average                      Average
                                     Balance   Interest  Rate    Balance    Interest  Rate    Balance   Interest   Rate
                                    ---------  --------  ----   ---------  ---------  -----  ---------  --------   -----
                                                                   (dollars in thousands)
<S>                                 <C>        <C>       <C>    <C>        <C>        <C>    <C>        <C>        <C>
Federal funds sold                  $   2,342  $     28  1.20%  $  12,961  $     220  1.70%  $  17,481  $    591   3.38%
Investment securities - taxable     $  42,566  $  1,433  3.37%  $  51,924  $   2,404  4.63%  $  46,233  $  2,704   5.85%
Investment securities - tax-exempt  $  25,366  $    873  3.44%  $  25,935  $   1,109  4.28%  $  23,909  $  1,217   5.09%
Loans, net of unearned income       $ 306,511  $ 19,762  6.45%  $ 280,975  $  20,688  7.36%  $ 291,459  $ 24,137   8.28%
                                    ---------  --------         ---------  ---------         ---------  --------
Total earning assets                $ 376,785  $ 22,096  5.86%  $ 371,795  $  24,421  6.57%  $ 379,082  $ 28,649   7.56%
                                    =========  ========         =========  =========         =========  ========
Interest bearing deposits           $ 295,119  $  5,214  1.77%  $ 298,680  $   6,588  2.21%  $ 309,846  $ 11,380   3.67%
Funds borrowed                      $   6,886  $    249  3.62%  $   5,230  $     228  4.36%  $   4,718  $    212   4.49%
                                    ---------  --------         ---------  ---------         ---------  --------
Total interest bearing liabilities  $ 302,005  $  5,463  1.81%  $ 303,910  $   6,816  2.24%  $ 314,564  $ 11,592   3.69%
                                    =========  --------         =========  ---------         =========  --------
Net interest income                            $ 16,633                    $  17,605                    $ 17,057
Net interest spread                            ========  4.05%             =========  4.33%             ========   3.87%
Net interest margin                                      4.41%                        4.74%                        4.50%
</TABLE>

         The following table shows the dollar amount of changes in interest
income for each major category of interest earning asset, interest expense for
each major category of interest bearing liability and the amount of the change
attributable to changes in average balances (volume) or average interest rates
for the periods shown.

<TABLE>
<CAPTION>
                                         2003 compared to 2002                          2002 compared to 2001
                                    -----------------------------------         ------------------------------------
                                     Change   Change   Change                    Change   Change  Change
                                     due to   due to   due to   Total            due to   due to  due to     Total
                                      Rate    Volume    Mix     Change            Rate    Volume    Mix      Change
                                    --------  -------  ------  --------         --------  ------  -------   --------
                                                                    (in thousands)
<S>                                 <C>       <C>      <C>     <C>              <C>       <C>     <C>       <C>
Federal funds sold                  $    (65) $  (181) $   54  $   (192)        $   (294) $ (153) $  76     $   (371)
Investment securities - taxable     $   (654) $  (433) $  116  $   (971)        $   (564) $  334  $ (70)    $   (300)
Investment securities - tax-exempt  $   (218) $   (24) $    6  $   (236)        $   (194) $  103  $ (17)    $   (108)
Loans, net of unearned income       $ (2,557) $ 1,879  $ (248) $   (926)        $ (2,681) $ (868) $ 100     $ (3,449)
                                    --------  -------  ------  --------         --------  ------  -----     --------
Total interest income               $ (3,494) $ 1,241  $  (72) $ (2,325)        $ (3,733) $ (584) $  89     $ (4,228)
                                    --------  -------  ------  --------         --------  ------  -----     --------
Interest bearing deposits           $ (1,314) $   (79) $   19  $ (1,374)        $ (4,524) $ (410) $ 142     $ (4,792)
Funds borrowed                      $    (39) $    72  $  (12) $     21         $     (6) $   23  $  (1)    $     16
                                    --------  -------  ------  --------         --------  ------  -----     --------
Total interest expense              $ (1,353) $    (7) $    7  $ (1,353)        $ (4,530) $ (387) $ 141     $ (4,776)
                                    --------  -------  ------  --------         --------  ------  -----     --------
Net interest income                 $ (2,141) $ 1,248  $  (79) $   (972)        $    797  $ (197) $ (52)    $    548
                                    ========  =======  ======  ========         ========  ======  =====     ========
</TABLE>

         Management expects market interest rates to remain relatively stable
during the first quarter of 2004, then begin to rise later in the year. Rising
interest rates could have a slight negative impact on the Bank's net interest
income. However, the Bank's Asset/Liability Committee meets regularly to, among
other things, monitor interest rate fluctuations and to change product mix and
pricing in an effort to provide steady growth in net interest income.

                                                                              34
<PAGE>

         The following table presents the changes in the allowance for loan
losses during the periods indicated.

<TABLE>
<CAPTION>
                                                2003        2002         2001       2000       1999
                                              ---------   ---------   ---------   --------  ----------
                                                                   (in thousands)
<S>                                           <C>         <C>         <C>         <C>        <C>
Balance - Beginning of year                   $   4,632   $   5,585   $  10,891   $ 13,547   $  14,002

Loans charged off:
Mortgages on real estate                           (175)        (32)         (4)       (27)          -
Commercial                                         (145)       (782)     (3,863)    (2,478)     (2,221)
Consumer                                         (1,233)     (1,348)     (1,104)      (354)       (229)
                                              ---------   ---------   ---------   --------   ---------
  Total Charge offs                              (1,553)     (2,162)     (4,971)    (2,859)     (2,450)

Recoveries on loans previously charged off:
Mortgages on real estate                              5           -           1         14           -
Commercial                                          474       1,541         854      1,443       3,217
Consumer                                            329         468         310        346         528
                                              ---------   ---------   ---------   --------   ---------
  Total Recoveries                                  808       2,009       1,165      1,803       3,745

Provision for loan losses                             -        (800)     (1,500)    (1,600)     (1,750)
                                              ---------   ---------   ---------   --------   ---------

Balance - End of year                         $   3,887   $   4,632   $   5,585   $ 10,891   $  13,547
                                              =========   =========   =========   ========   =========
</TABLE>

         Non-performing loan decreased $466 thousand to $3.5 million at December
31, 2003 (see page 30). Net charge-offs increased $592 thousand in 2003 to $745
thousand. After analysis of the allowance for loan losses, management determined
that no provision was necessary in 2003. This compares to reversals from the
allowance of $800 thousand and $1.5 million into income through negative loan
loss provisions in 2002 and 2001.

         Non-interest income, which consists of service charges and other fees
of $6,035,000, $4,668,000, and $5,705,000 were recorded for the years ended
December 31, 2003, 2002 and 2001, respectively. This represents an increase of
29% in 2003 compared to a decrease of 18% in 2002. The significant increase in
2003 is primarily due to a $759 thousand increase in service charges on deposit
accounts, most of which is related to a new overdraft privilege product that was
introduced late in 2002. In addition, there was a $338 thousand increase in the
gain on the sale of mortgage loans. The decrease in 2002 was a result of the
$1.6 million in non-recurring gains recorded in 2001, partially offset by a $230
thousand increase in deposit service charge income and a $257 thousand increase
in loan related fee income that is included in other income.

         Non-interest expense, which includes salaries and benefits, occupancy
and other operating expenses, increased to $17.0 million in 2003 from $15.7
million in 2002, an increase of $1.3 million or 8.0%. Salary and benefits
expense increased $377 thousand or 4% in 2003. Increased employment taxes and
benefits accounted for $202 thousand of this increase. Occupancy expenses
increased $336 thousand in 2003. This includes the expenses for the new loan
production offices opened in 2003 and a full year's expenses for one of our
branches that was opened in 2002. Legal and professional fees increased $270
thousand and other operating expenses increased $281 thousand, including
increases of $54 thousand in state taxes and $56 thousand in expenses related to
the new overdraft privilege product. For the year ended December 31, 2002,
non-interest expense decreased $456 thousand, or 2.8% from $16.2 million in
2001. A $166 thousand drop in single business tax expense and a $164 thousand
decrease in goodwill amortization were major contributing factors in the
reduction in total other operating expense in 2002.

         Changes in income tax expenses during 2003 and 2002 are reflective of
the Bank's $1.7 million decrease in pretax income in 2003 and the $733 thousand
decrease in 2002.

         LIQUIDITY AND CAPITAL RESOURCES. Liquidity is the measurement of the
Bank's ability to have adequate cash or access to cash to meet financial
obligations when due as well as to fund corporate expansion or other activities.
The Bank expects to meet its liquidity requirements through a combination of
working capital provided by operating activities, attracting customer deposits,
advances under Federal Home Loan Bank credit facilities, and possible future
periodic sales of mortgages into secondary markets. Management believes that the
Bank's cash flow will be sufficient to support its existing operations for the
foreseeable future.

                                                                              35
<PAGE>

         Net income and depreciation and amortization continue to be the primary
sources of cash from operating activities. During 2003, net income provided $4.2
million of cash compared to $5.3 million during 2002 and $5.8 million during
2001. Depreciation and amortization was a non-cash expense totaling $1.1 million
for the year ended December 31, 2003, $1.0 million in 2002 and $1.3 million in
2001. These non-cash items had been included in net income for purposes of
calculating the results of operations during the respective years, and therefore
are added to or subtracted from net income in determining cash flow from
operating activities.

         The primary uses of cash for the Bank are the funding of customer
loans, purchase of investment securities and the repayment of customer deposits.
The Bank's primary sources of cash are customer deposits, proceeds from the
maturity or sale of investment securities, repayment of loans, and advances on
borrowings from the Federal Home Loan Bank, of which the Bank cannot exceed $26
million. During 2003, the Bank had a net cash outlay of $38.4 million from the
increase in the loan portfolio. This compares to a net cash outlay of $12.5
million in 2002 and a net inflow of $18.7 million in 2001.

         The Bank had total securities purchases of $16 million, $63 million and
$27 thousand during 2003, 2002, and 2001, respectively. Securities sales or
maturities totaled $53.9 million, $44.3 million and $26.5 million respectively,
for each of those periods.

         The Bank experienced a net increase in deposits of $10.2 million in
2003 compared to a net decrease in customer deposits of $4.8 million in 2002 and
a net decrease of $7.3 million in 2001. The Bank used $6.8 million to pay down
borrowings in 2003 compared to the $9 million and $5 million that were provided
by increased borrowings in 2002 and 2001, respectively

         The capital level of the Corporation was reduced $4.5 million in 2003
to $41 million. The main reason for the reduction in capital was the repurchase
of 263,118 shares of common stock for $6,134,000 in October, 2003. At December
31, 2003, the ratio of stockholders' equity to total assets was 10.2% compared
to 11.3% at December 31, 2002. The capital levels of the Bank and the
Corporation exceed the minimum guidelines for being considered well capitalized
(see note 17 to the financial statements). Management believes the capital
levels will be adequate to, among other things, fund banking activities for the
foreseeable future.

         At December 31, 2003, the Bank held cash and cash equivalents of
approximately $14 million and the entire investment portfolio of $47.6 million
was classified as available-for-sale. The estimated market value of the
available-for-sale securities exceeded amortized cost by approximately $500
thousand at December 31, 2003.

         The primary impact of inflation on the Corporation's operations is
increased asset yields, deposit costs and operating overhead. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than they would
on non-financial companies. Although interest rates do not necessarily move in
the same direction, or to the same extent, as the prices of goods and services,
increases in inflation generally have resulted in increased interest rates. The
effects of inflation can magnify the growth of assets and if significant,
require that equity capital increase at a faster rate than would otherwise be
necessary.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         To a great extent, the Corporation's operating strategies focus on
asset/liability management. The purpose of its Asset/Liability Management Policy
is to provide stable net interest income growth while both maintaining adequate
liquidity and protecting the Bank's earnings from undue interest rate risk. The
Bank follows its Asset/Liability Management Policy for controlling exposure to
interest rate risk. The Asset/Liability Management Policy is established by
Management and is approved by the Board of Directors. In order to control risk
in a rising interest rate environment, Management's strategy is generally to
shorten the average maturity of the investment portfolio, thereby making the
portfolio more liability sensitive. Because of loan repayments, the investment
securities due to mature in 2004 and available lines of credit, management
believes the Bank is sufficiently liquid.

         The Asset/Liability Management Policy also is designed to maintain an
appropriate balance between rate-sensitive assets and liabilities in order to
maximize interest rate spreads. The Bank monitors the sensitivity of its assets
and liabilities with respect to changes in interest rates and maturities and
directs the allocation of its funds accordingly. The strategy of the Bank has
been to maintain, to the extent possible, a balanced position between assets and
liabilities and to place appropriate emphasis on the sensitivity of its assets.

                                                                              36
<PAGE>

         The following table sets forth the estimated maturity or re-pricing and
the resulting interest sensitivity gap, of the Bank's interest-earning assets
and interest-bearing liabilities at December 31, 2003 and the cumulative
interest sensitivity gap at December 31, 2003. The amounts in the table are
derived from internal data of the Bank and could be significantly affected by
external factors such as changes in prepayment assumptions, early withdrawals of
deposits and competition.

<TABLE>
<CAPTION>
                                                        Estimated Maturity or Re-pricing at December 31, 2003
                                             -------------------------------------------------------------------------------
                                             Less than three    Three months to     One to five   Due after five      Total
                                                 months        less than one year      years           years
                                             ---------------   ------------------   -----------   --------------   ----------
<S>                                          <C>               <C>                  <C>           <C>              <C>
Interest earning assets:
  Securities (1) (2)                         $        13,778   $           10,653   $    14,693   $        8,495   $   47,619
  Loans                                              121,578               27,917       128,157           48,610      326,262
                                             ---------------   ------------------   -----------   --------------   ----------

    Total interest earning assets            $       135,356   $           38,570   $   142,850   $       57,105   $  373,881
                                             ===============   ==================   ===========   ==============   ==========
Interest bearing liabilities:
  Savings and interest bearing
    demand deposits                          $       162,491   $                -   $         -   $            -   $  162,491
  Time deposits                                       30,921               47,428        56,736                -      135,085
  Short term borrowings                                2,420                    -             -                -        2,420
  Long term borrowings                                     -                    -             -            5,000        5,000
                                             ---------------   ------------------   -----------   --------------   ----------
    Total interest bearing liabilities       $       195,832   $           47,428   $    56,736   $        5,000   $  304,996
                                             ===============   ==================   ===========   ==============   ==========

Interest rate sensitivity gap - current      $       (60,476)  $           (8,858)  $    86,114   $       52,105   $   68,885
                                             ===============   ==================   ===========   ==============   ==========
Interest rate sensitivity gap - cumulative   $       (60,476)  $          (69,334)  $    16,780   $       68,885
                                             ===============   ==================   ===========   ==============
Cumulative interest rate sensitivity
  gap as a percent of total assets                    -15.06%              -17.27%         4.18%           17.16%
                                                       =====                =====          ====            =====
</TABLE>

(1) Equity investments have been placed in the 0-3 month category.

(2) Re-pricing is based on anticipated call dates, and may vary from contractual
    maturities.

         Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities and periods to re-pricing, they may react differently to
changes in market interest rates. Also, interest rates on assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest
rates on other assets and liabilities may follow changes in market interest
rates. Additionally, certain assets have features that restrict changes in the
interest rates of such assets, both on a short-term basis and over the lives of
such assets. The gap table presented above is based on stated maturities and
next re-pricing dates and does not take into account prepayment or withdrawal
assumptions. In the event of a change in market interest rates, prepayments and
early withdrawals could cause significant deviation from the stated maturities
and re-pricings.

         According to the traditional banking industry static gap table set
forth above, the Bank was liability sensitive with a negative cumulative
one-year gap of $69.3 million or 19% of interest-earning assets at December 31,
2003. In general, based upon the Bank's mix of deposits, loan and investments,
increases in interest rates would be expected to result in a decrease in the
Bank's net interest margin.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

         ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is calculated
with the objective of maintaining a reserve sufficient to absorb estimated
probable loan losses. Loan losses are charged against the allowance when
management believes loan balances are uncollectible. Subsequent recoveries, if
any, are credited to the allowance. Management's determination of the adequacy
of the allowance is based on periodic evaluations of the loan portfolio and
other relevant factors. This evaluation is inherently subjective as it requires
an estimate of the loss content for each risk rating and for each impaired loan,
an estimate of the amounts and timing of expected future cash flows and an
estimate of the value of collateral.

                                                                              37
<PAGE>

         A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the scheduled
payments of principal and interest when due, according to the contractual terms
of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value and the probability of
collecting principal and interest payments when due. Impairment is measured on a
loan-by-loan basis for commercial and construction loans by either the present
value of expected future cash flows discounted at the loan's effective interest
rate, the loan's obtainable market price, or the fair value of the collateral if
the loan is collateral dependent. Large groups of homogeneous loans are
collectively evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer and residential loans for impairment disclosures.

         ACCOUNTING FOR GOODWILL - Effective January 1, 2002, the Corporation
adopted Statement of Financial Standard No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142), which changes the Corporation's accounting for goodwill and
other intangible assets. Generally, intangible assets that meet certain criteria
are recognized and subsequently amortized over their estimated useful lives.
Goodwill and intangible assets with indefinite lives are not amortized. However,
such assets are tested for impairment at adoption of SFAS 142 and at least
annually thereafter. The adoption of SFAS 142 resulted in an increase in net
income for 2002 of approximately $164,000 due to a decrease in amortization
expense. No impairment loss was recorded upon the adoption of SFAS 142 in 2002,
nor was any impairment loss was recorded in 2003.

                                                                              38
<PAGE>

MARKET INFORMATION

The table below shows, for the periods indicated, the high and low prices for
common stock in the over-the-counter market of which PSB Group, Inc. is aware.
This information was obtained from a third-party reporting service and while we
believe the information is correct, we do not warrant its accuracy. These
quotations may represent inter-dealer prices without retail mark-ups, mark-downs
or commissions and do not necessarily represent actual stock transactions. There
is not an active market for the common stock of PSB Group, Inc.

<TABLE>
<CAPTION>
    2003                 HIGH                LOW           DIVIDEND DECLARED
--------------          -------            -------         -----------------
<S>                     <C>                <C>             <C>
FIRST QUARTER           $ 16.58            $ 15.25              $ 0.15
SECOND QUARTER          $ 22.00            $ 15.38              $ 0.15
THIRD QUARTER           $ 22.50            $ 20.00              $ 0.17
FOURTH QUARTER          $ 23.75            $ 20.25              $ 0.17
</TABLE>

<TABLE>
<CAPTION>
    2002                 High                Low           Dividend Declared
--------------          -------            -------         -----------------
<S>                     <C>                <C>             <C>
First Quarter           $ 15.50            $ 14.12              $ 0.15
Second Quarter          $ 15.33            $ 14.17              $ 0.15
Third Quarter           $ 15.50            $ 14.80              $ 0.15
Fourth Quarter          $ 15.81            $ 14.82              $ 0.25
</TABLE>

On December 31, 2003, PSB Group, Inc. had 427 holders of record of its common
stock. The stock is quoted on the OTC Bulletin Board under the symbol "PSBG.OB".
Howe Barnes Investments, Inc. and Monroe Securities, Inc. are market makers in
the stock.

Contact Information:

Nick Bach, Vice President                        Dan Kanter
Howe Barnes Investments, Inc.                    Monroe Securities, Inc.
135 S. LaSalle St.                               343 West Erie Street, Suite 410
Chicago, IL 60603                                Chicago, IL  60610
(800) 800-4693                                   (800) 766-5560

         ANNUAL MEETING OF SHAREHOLDERS

THE ANNUAL MEETING OF THE SHAREHOLDERS OF PSB GROUP, INC. WILL BE HELD AT 2:00
PM, TUESDAY, APRIL 27, 2004 AT THE FOLLOWING LOCATION:

UKRAINIAN CULTURAL CENTER
26601 RYAN ROAD
WARREN, MI  48089

SHAREHOLDERS ARE INVITED TO ATTEND.

                                                                              39
<PAGE>


PSB ANNUAL REPORT 2003                    Tami Janowicz
                                          Vice President
DIRECTORS                                 Compliance/CRA Director
David L. Wood
Chairman,                                 James E. Kujawski
Peoples State Bank                        Senior Vice President
Manufacturing Manager,
Colonial Bushings                         Janet Love
                                          Vice President
Longine V. Morawski                       Mortgage Controller
Vice Chairman,                            Universal Mortgage Corporation
Peoples State Bank
President,                                David Pierle
MP Tool & Engineering                     Vice President
                                          Commercial Loan Officer
Robert L. Cole
President & CEO,                          Catherine M. Revord
Peoples State Bank                        Vice President - Human
                                            Resources Director
Michael J. Kowalski  President,
Kowalski Companies                        Jon Shamus
                                          Vice President - Controller
Craig J. Mancinotti
Principal,                                Jamie Zaborowski
Austin Associates, Inc.                   Vice President
                                          Secondary Mortgage Manager
Sydney L. Ross                            Universal Mortgage Corporation
President,
General Wine                              Avis Karim
& Liquor Company                          Vice President
                                          Commercial Loan Officer
Edward H. Turner
President,                                Teresa Glantz
Turner & Associates Consultants           Assistant Vice President
                                          Branch Officer
Dr. James Jacobs
Director, Center for Workplace Dev.
Macomb Community College                  Barbara Heath
                                          Assistant Vice President
Thomas F. Meeker                          Operations Officer
Director Emeritus
Retired Banker                            Rose Mary Kalcevic
                                          Assistant Vice President
EXECUTIVE OFFICERS AND                    Security Officer
 SUBSIDIARY PRESIDENTS
                                          Marlene Lorenzetti
David L. Wood                             Assistant Vice President
Chairman,                                 Information Technology Officer
Peoples State Bank
Manufacturing Manager,                    Deborah McMahon
Colonial Bushings                         Assistant Vice President
                                          Commercial Loan Officer
Longine V. Morawski
Vice Chairman,                            Mark Sandri
Peoples State Bank                        Assistant Vice President
President,                                Commercial Portfolio Supervisor
MP Tool & Engineering
                                          Alfred F. Trombley
Robert L. Cole                            Assistant Vice President
President & CEO                           Marketing Officer

David A. Wilson Senior Vice President     Ellen George
& CFO                                     Loan Review Officer

Theodore G. Bangert                       Rosa Giovinazzo
Senior Vice President                     Credit Department Officer

Donald R. Phillippi                       Bonnie Kilbourn
Senior Vice President                     Loan Administration Officer

James M. Nieman                           JoAnn Molotky
President, Universal Mortgage             Collections Department Officer
 Corporation
                                          Julie Osborne
BANK OFFICERS                             Managed Assets Loan Officer

David M. Borcherding                      Elizabeth Stafford
Vice President                            Branch Officer
Senior Commercial Loan Officer
                                          Maureen Zak
Janet Healy                               2nd Vice President
Vice President
Branch Manager, Mortgage
Consultant - Universal Mortgage
 Corporation